**Exhibit 99.2**

 

**CONSOLIDATEDFINANCIAL STATEMENTS ANDREPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS  TO SHAREHOLDERS**

 

**For theFiscal Year Ended December 31, 2008**

 

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**Management’s Report**

 

Managements’ Responsibility onFinancial Statements

 

Management is responsible forthe preparation of the accompanying consolidated financial statements and forthe consistency therewith of all other financial and operating data presentedin this annual report. The consolidated financial statements have been preparedin accordance with the accounting policies detailed in the notes thereto. InManagement’s opinion, the consolidated financial statements are in accordancewith Canadian generally accepted accounting principles, have been preparedwithin acceptable limits of materiality, and have utilized supportable,reasonable estimates.

 

To ensure the integrity of ourfinancial statements, we carefully select and train qualified personnel. Wealso ensure our organizational structure provides appropriate delegation of authorityand division of responsibilities. Our policies and procedures are communicatedthroughout the organization including a written ethics and integrity policythat applies to all employees including the chief executive officer and chieffinancial officer.

 

The Board of Directors approvesthe consolidated financial statements. Their financial statement relatedresponsibilities are fulfilled mainly through the Audit Committee. The AuditCommittee is composed entirely of independent directors, and includes at leastone director with financial expertise. The Audit Committee meets regularly withmanagement and the external auditors to discuss reporting and control issuesand ensures each party is properly discharging its responsibilities. The AuditCommittee also considers the independence of the external auditors and reviewstheir fees.

 

The consolidated financialstatements have been audited by Deloitte & Touche LLP, independentauditors, in accordance with generally accepted auditing standards on behalf ofthe unitholders.

 

**Management’s Report on InternalControl over Financial Reporting**

 

Management is responsible forestablishing and maintaining an adequate system of internal control overfinancial reporting. Internal control over financial reporting is a processdesigned to provide reasonable assurance that all assets are safeguarded,transactions are appropriately authorized and to facilitate the preparation ofrelevant, reliable and timely information. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Management has assessed the effectiveness of the Trust’sinternal control over financial reporting as defined in Rule 13a-15 underthe US Securities Exchange Act of 1934. The assessment was based on theframework in Internal Control – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Management concluded thatthe Trust’s internal control over financial reporting was effective as of December 31,2008. The Trust’s internal control over financial reporting as of December 31,2008 has been audited by Deloitte & Touche LLP, the Trust’sIndependent Registered Chartered Accountants, who also audited the Trust’sconsolidated financial statements for the year ended December 31, 2008.

 
|                                        |   |                                                            |
|----------------------------------------|--------|------------------------------------------------------------|
|                                   |   |                                                       |
| John P. Dielwart                       |   | Steven W. Sinclair                                         |
| President and Chief Executive  Officer |   | Senior Vice-President Finance  and Chief Financial Officer |
|                                   |   |                                                       |
| Calgary, Alberta                       |   |                                                       |
| February 6, 2009                  |   |                                                       |

 

 

1

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**REPORT OF INDEPENDENT REGISTEREDCHARTERED ACCOUNTANTS**

 

Tothe Board of Directors of ARC Resources Ltd. and

Unitholdersof ARC Energy Trust:

 

Wehave audited the accompanying consolidated balance sheets of ARC Energy Trustand subsidiaries (the “Trust”) as at December 31, 2008 and 2007, and therelated consolidated statements of income and deficit, comprehensive income andaccumulated other comprehensive income and cash flows for the years thenended.  These financial statements are theresponsibility of the Trust’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States).  These standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, these consolidated financial statements present fairly, in allmaterial respects, the financial position of ARC Energy Trust and subsidiariesas at****December 31, 2008 and 2007, andthe results of their operations and their cash flows for the years then endedin accordance with Canadian generally accepted accounting principles.

 

Wehave also audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the Trust’s internal control over financialreporting as of December 31, 2008, based on****thecriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated February 6, 2009 expressed an unqualified opinion on the Trust’sinternal control over financial reporting.

 

IndependentRegistered Chartered Accountants

Calgary,Canada

February 6,2009

 

**COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ONCANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE**

 

Thestandards of the Public Company Accounting Oversight Board  (United States) require the addition of anexplanatory paragraph (following the opinion paragraph) when there are changesin accounting principles that have a material effect on the comparability ofthe Trust’s financial statements, such as the changes described in Notes 3 and24  to the consolidated financialstatements.  Although we conducted ouraudits in accordance with both Canadian generally accepted auditing standardsand the standards of the Public Company Accounting Oversight Board (UnitedStates), our report to the Board of Directors of ARC Resources Ltd. andUnitholders of ARC Energy Trust, dated February 6, 2009, is expressed inaccordance with Canadian reporting standards which do not require a referenceto such changes in accounting principles in the auditors’ report when thechanges are properly accounted for and adequately disclosed in the financialstatements.

IndependentRegistered Chartered Accountants

Calgary,Canada

February 6,2009

 

2

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**REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**

 

Tothe Board of Directors of ARC Resources Ltd. and

Unitholdersof ARC Energy Trust:

 

Wehave audited the internal control over financial reporting of ARC Energy Trustand subsidiaries (the “Trust”)****as of December 31,2008, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  The Trust’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal ControlOver Financial Reporting.  Ourresponsibility is to express an opinion on the Trust’s internal control overfinancial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessedrisk, and performing such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis.  Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, the Trust maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based on thecriteria established in InternalControl — Integrated Framework**issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with Canadiangenerally accepted auditing standards and the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended December 31, 2008 of the Trust andour report dated February 6, 2009 expressed an unqualified opinion onthose financial statements and included a separate report titled Comments byIndependent Registered Chartered Accountants on Canada-United States of AmericaReporting Difference referring to changes in accounting principles.

 

 

IndependentRegistered Chartered Accountants

Calgary,Canada

February 6,2009

 

3

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**CONSOLIDATED BALANCE SHEETS**

Asat December 31 

 
| **(Cdn$ millions)**                                 | ** ** | **2008**    | ** **  | **2007**   | ** ** |
|----------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **ASSETS**                                               |       |        | ** **  |       |       |
| Current assets                                           |       |        | ** **  |       |       |
| Cash and cash equivalents (Note 4)                       | ** ** | **$**       | **40.0**    | ** ** | $          | 7.0 |   |
| Accounts receivable (Note 5)                             | ** ** | **110.0**   | ** **  | 162.5      |       |
| Prepaid expenses                                         | ** ** | **16.8**    | ** **  | 15.0       |       |
| Risk management contracts (Notes 5 and 13)               | ** ** | **24.4**    | ** **  | 13.1       |       |
| Future income taxes (Note 15)                            | ** ** | **3.9**     | ** **  | 4.0        |       |
| ** **                                               |       | **195.1**   | ** **  | 201.6      |       |
| Reclamation funds (Note 6)                               | ** ** | **28.2**    | ** **  | 26.1       |       |
| Risk management contracts (Notes 5 and 13)               | ** ** | **9.2**     | ** **  | 4.7        |       |
| Property, plant and equipment (Note 7)                   | ** ** | **3,376.6** | ** **  | 3,143.0    |       |
| Goodwill                                                 | ** ** | **157.6**   | ** **  | 157.6      |       |
| Total assets                                             | ** ** | **$**       | **3,766.7** | ** ** | $          | 3,533.0 |   |
|                                                     |       |        | ** **  |       |       |
| **LIABILITIES**                                          |       |        | ** **  |       |       |
| Current liabilities                                      |       |        | ** **  |       |       |
| Accounts payable and accrued liabilities  (Note 9)       | ** ** | **$**       | **194.4**   | ** ** | $          | 180.6 |   |
| Distributions payable                                    | ** ** | **32.5**    | ** **  | 42.1       |       |
| Risk management contracts (Notes 5 and 13)               | ** ** | **23.5**    | ** **  | 57.6       |       |
| ** **                                               |       | **250.4**   | ** **  | 280.3      |       |
| Risk management contracts (Notes 5 and 13)               | ** ** | **3.4**     | ** **  | 28.2       |       |
| Long-term debt (Note 10)                                 | ** ** | **901.8**   | ** **  | 714.5      |       |
| Accrued long-term incentive compensation  (Note 21)      | ** ** | **14.2**    | ** **  | 12.1       |       |
| Asset retirement obligations (Note 11)                   | ** ** | **141.5**   | ** **  | 140.0      |       |
| Future income taxes (Note 15)                            | ** ** | **313.3**   | ** **  | 316.2      |       |
| Total liabilities                                        | ** ** | **1,624.6** | ** **  | 1,491.3    |       |
|                                                     |       |        | ** **  |       |       |
| **COMMITMENTS AND CONTINGENCIES (Note 22)**              |       |        | ** **  |       |       |
|                                                     |       |        | ** **  |       |       |
| **NON-CONTROLLING INTEREST**                             |       |        | ** **  |       |       |
| Exchangeable shares (Note 16)                            | ** ** | **42.4**    | ** **  | 43.1       |       |
|                                                     |       |        | ** **  |       |       |
| **UNITHOLDERS’ EQUITY**                             |       |        | ** **  |       |       |
| Unitholders’ capital (Note 17)                      | ** ** | **2,600.7** | ** **  | 2,465.7    |       |
| Contributed surplus (Note 20)                            | ** ** | **—**  | ** **  | 1.7        |       |
| Deficit (Note 18)                                        | ** ** | **(502.9**  | **)**       | (465.9     | )          |
| Accumulated other comprehensive income  (loss) (Note 18) | ** ** | **1.9**     | ** **  | (2.9       | )          |
| Total unitholders’ equity                           | ** ** | **2,099.7** | ** **  | 1,998.6    |       |
| Total liabilities and unitholders’ equity           | ** ** | **$**       | **3,766.7** | ** ** | $          | 3,533.0 |   |

 

Seeaccompanying notes to the consolidated financial statements

 

4

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**CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT**

For the years ended December 31

 
| **(Cdn$ millions, except per unit amounts)** | ** ** | **2008**    | ** **  | **2007**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
|                                                                  |       |        | ** **  |       |       |
| **REVENUES**                                                          |       |        | ** **  |       |       |
| Oil, natural gas and natural gas liquids                              | ** ** | **$**       | **1,706.4** | ** ** | $          | 1,251.6 |   |
| Royalties                                                             | ** ** | **(307.7**  | **)**       | (219.4     | )          |
| ** **                                                            |       | **1,398.7** | ** **  | 1,032.2    |       |
| Gain (loss) on risk management contracts  (Note 13)                   |       |        | ** **  |       |       |
| Realized                                                              | ** ** | **(75.7**   | **)**       | 14.1       |       |
| Unrealized                                                            | ** ** | **68.0**    | ** **  | (55.9      | )          |
| ** **                                                            |       | **1,391.0** | ** **  | 990.4      |       |
|                                                                  |       |        | ** **  |       |       |
| **EXPENSES**                                                          |       |        | ** **  |       |       |
| Transportation                                                        | ** ** | **19.0**    | ** **  | 16.4       |       |
| Operating                                                             | ** ** | **241.5**   | ** **  | 218.4      |       |
| General and administrative                                            | ** ** | **61.2**    | ** **  | 49.1       |       |
| Provision for non-recoverable accounts  receivable (Note 5)           | ** ** | **32.0**    | ** **  | —     |       |
| Interest on long-term debt (Note 10)                                  | ** ** | **32.9**    | ** **  | 36.9       |       |
| Depletion, depreciation and accretion  (Notes 7 and 11)               | ** ** | **379.6**   | ** **  | 371.5      |       |
| Loss (gain) on foreign exchange (Note 14)                             | ** ** | **89.4**    | ** **  | (69.4      | )          |
| ** **                                                            |       | **855.6**   | ** **  | 622.9      |       |
|                                                                  |       |        | ** **  |       |       |
| Gain on sale of investment (Note 8)                                   | ** ** | **—**  | ** **  | 13.3       |       |
| Future income tax recovery (Note 15)                                  | ** ** | **4.5**     | ** **  | 121.3      |       |
| Net income before non-controlling interest                            | ** ** | **539.9**   | ** **  | 502.1      |       |
| Non-controlling interest (Note 16)                                    | ** ** | **(6.9**    | **)**       | (6.8       | )          |
| Net income                                                            | ** ** | **$**       | **533.0**   | ** ** | $          | 495.3 |   |
|                                                                  |       |        | ** **  |       |       |
| Deficit, beginning of year                                            | ** ** | **$**       | **(465.9**  | **)**      | $          | (463.2 | ) |
| Distributions paid or declared (Note 19)                              | ** ** | **(570.0**  | **)**       | (498.0     | )          |
| Deficit, end of year (Note 18)                                        | ** ** | **$**       | **(502.9**  | **)**      | $          | (465.9 | ) |
|                                                                  |       |        | ** **  |       |       |
| Net income per unit (Note 17)                                         |       |        | ** **  |       |       |
| Basic                                                                 | ** ** | **$**       | **2.50**    | ** ** | $          | 2.39 |   |
| Diluted                                                               | ** ** | **$**       | **2.50**    | ** ** | $          | 2.39 |   |

 

Seeaccompanying notes to the consolidated financial statements

 

5

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**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ANDACCUMULATED OTHER COMPREHENSIVE INCOME**

Forthe years ended December 31

 
| **(Cdn$ millions, except per unit amounts)**                                                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                       |       |       | ** ** |       |       |
| Net income                                                                                                                                                 | ** ** | **$**      | **533.0**  | ** ** | $          | 495.3 |   |
|                                                                                                                                                       |       |       | ** ** |       |       |
| Other comprehensive income (loss), net of  tax                                                                                                             |       |       | ** ** |       |       |
| Gains (losses) on financial instruments  designated as cash flow hedges (1)                                                                                | ** ** | **(2.2**   | **)**      | (7.4       | )          |
| De-designation of cash flow hedge (2) (Note 13)                                                                                                       | ** ** | **10.0**   | ** ** | —     |       |
| Gains and losses on financial instruments  designated as cash flow hedges in prior periods realized in net income in the  current year (3) (Note  13) | ** ** | **(2.9**   | **)**      | (0.3       | )          |
| Net unrealized gains (losses) on  available-for-sale reclamation funds’ investments (4)                                                               | ** ** | **(0.1**   | **)**      | (0.1       | )          |
| Other comprehensive (loss) income                                                                                                                          | ** ** | **4.8**    | ** ** | (7.8       | )          |
| Comprehensive income                                                                                                                                       | ** ** | **$**      | **537.8**  | ** ** | $          | 487.5 |   |
|                                                                                                                                                       |       |       | ** ** |       |       |
| Accumulated other comprehensive income  (loss), beginning of year                                                                                          | ** ** | **(2.9**   | **)**      | —     |       |
| Application of initial adoption                                                                                                                            | ** ** | **—** | ** ** | 4.9        |       |
| Other comprehensive (loss) income                                                                                                                          | ** ** | **4.8**    | ** ** | (7.8       | )          |
| Accumulated other comprehensive income  (loss), end of year (Note 18)                                                                                      | ** ** | **$**      | **1.9**    | ** ** | $          | (2.9 | ) |

 

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| (1) | Amounts  are net of tax of $0.8 million for the year ended December 31, 2008 (net  of tax of $2.7 million for the year ended December 31, 2007). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Amount  is net of tax of $3.6 million for the year ended December 31, 2008.                                                                           |
| (3) | Amounts  are net of tax of $1 million year ended December 31, 2008 (net of tax of  $0.1 million for the year ended December 31, 2007).           |
| (4) | Nominal  future income tax impact for the year ended December 31, 2008 (nominal  for the year ended December 31, 2007).                          |

 

Seeaccompanying notes to the consolidated financial statements

 

6

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

For the years ended December 31

 
| **(Cdn$ millions)**                                           | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                               |       |       | ** ** |       |       |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                           |       |       | ** ** |       |       |
| Net income                                                         | ** ** | **$**      | **533.0**  | ** ** | $          | 495.3 |   |
| Add items not involving cash:                                      |       |       | ** ** |       |       |
| Non-controlling interest (Note 16)                                 | ** ** | **6.9**    | ** ** | 6.8        |       |
| Future income tax recovery (Note 15)                               | ** ** | **(4.5**   | **)**      | (121.3     | )          |
| Depletion, depreciation and accretion  (Notes 7 and 11)            | ** ** | **379.6**  | ** ** | 371.5      |       |
| Non-cash (gain) loss on risk management  contracts (Note 13)       | ** ** | **(68.0**  | **)**      | 55.9       |       |
| Non-cash loss (gain) on foreign exchange  (Note 14)                | ** ** | **88.5**   | ** ** | (69.6      | )          |
| Non-cash trust unit incentive compensation  expense (Note 21)      | ** ** | **1.0**    | ** ** | 3.5        |       |
| Gain on sale of investment (Note 8)                                | ** ** | **—** | ** ** | (13.3      | )          |
| Expenditures on site restoration and  reclamation (Note 11)        | ** ** | **(12.4**  | **)**      | (18.2      | )          |
| Change in non-cash working capital                                 | ** ** | **20.3**   | ** ** | (5.7       | )          |
| ** **                                                         |       | **944.4**  |       | 704.9      |       |
|                                                               |       |       | ** ** |       |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                           |       |       | ** ** |       |       |
| Issuance of long-term debt under revolving  credit facilities, net | ** ** | **105.9**  | ** ** | 104.2      |       |
| Repayment of senior secured notes                                  | ** ** | **(7.1**   | **)**      | (5.8       | )          |
| Issue of trust units                                               | ** ** | **4.9**    | ** ** | 3.7        |       |
| Cash distributions paid (Note 19)                                  | ** ** | **(458.8** | **)**      | (388.4     | )          |
| Payment of retention bonuses                                       | ** ** | **—** | ** ** | (1.0       | )          |
| Change in non-cash working capital                                 | ** ** | **(0.4**   | **)**      | 0.4        |       |
| ** **                                                         |       | **(355.5** | **)**      | (286.9     | )          |
|                                                               |       |       | ** ** |       |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                           |       |       | ** ** |       |       |
| Acquisition of petroleum and natural gas  properties               | ** ** | **(51.2**  | **)**      | (43.7      | )          |
| Proceeds on disposition of petroleum and  natural gas properties   | ** ** | **0.2**    | ** ** | 1.2        |       |
| Capital expenditures                                               | ** ** | **(548.1** | **)**      | (396.5     | )          |
| Long-term investment (Note 8)                                      | ** ** | **—** | ** ** | 33.3       |       |
| Net reclamation fund (contributions)  withdrawals (Note 6)         | ** ** | **(2.2**   | **)**      | 4.7        |       |
| Change in non-cash working capital                                 | ** ** | **45.4**   | ** ** | (12.8      | )          |
| ** **                                                         |       | **(555.9** | **)**      | (413.8     | )          |
| **INCREASE IN CASH AND CASH EQUIVALENTS**                          | ** ** | **33.0**   | ** ** | 4.2        |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR**                  | ** ** | **7.0**    | ** ** | 2.8        |       |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                         | ** ** | **$**      | **40.0**   | ** ** | $          | 7.0 |   |

 

See accompanying notes to theconsolidated financial statements

 

7

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** **

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

 

December 31, 2008 and2007

(all tabular amounts in Cdn$millions, except per unit amounts)

 

**1.****    ****STRUCTURE OF THE TRUST**

 

ARC Energy Trust (the “Trust”) was formed on May 7, 1996 pursuantto a Trust indenture (the “Trust Indenture”) that has been amended from time totime, most recently on May 15, 2006. Computershare Trust Company of Canada was appointed as Trustee under theTrust Indenture.  The beneficiaries ofthe Trust are the holders of the Trust units.

 

The Trust was created for the purposes of issuing trust units to thepublic and investing the funds so raised to purchase a royalty in theproperties of ARC Resources Ltd. (“ARC Resources”) and ARC Oil & GasFund (“ARC Oil & Gas”).  As partof an internal reorganization on January 1, 2008 the properties of ARC Oil &Gas Fund were transferred to ARC Resources and the royalty in the properties ofARC Oil & Gas Fund was assigned to ARC Resources.  The Trust Indenture was amended on June 7,1999 to convert the Trust from a closed-end to an open-ended investmentTrust.  The current business of the Trustincludes the investment in all types of energy business-related assetsincluding, but not limited to, petroleum and natural gas-related assets,gathering, processing and transportation assets.  The operations of the Trust consist of theacquisition, development, exploitation and disposition of these assets and thedistribution of the net cash proceeds from these activities to the unitholders.

 

**2.****    ****SUMMARY OF ACCOUNTINGPOLICIES**

 

The Consolidated Financial Statements have been prepared by managementfollowing Canadian generally accepted accounting principles (“GAAP”).  These principles differ in certain respectsfrom accounting principles generally accepted in the United States of America (“USGAAP”) and to the extent that they affect the Trust, these differences aredescribed in Note 24.  The preparation offinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingencies at the date of the financial statements, and revenues andexpenses during the reporting year. Actual results could differ from those estimated.

 

The amounts recorded fordepreciation and depletion of petroleum and natural gas property and equipmentand for asset retirement obligations are based on estimates of petroleum andnatural gas reserves and future costs. Estimates of reserves also provide thebasis for determining whether the carrying value of property, plant andequipment is impaired. Accounts receivable are recorded at the estimated netrecoverable amount which involves estimates of uncollectable accounts. Goodwillimpairment tests involve estimates of the Trust’s fair value. By their nature,these estimates are subject to measurement uncertainty, and the impact on thefinancial statements of future periods could be material.

 

**Principles of Consolidation**

TheConsolidated Financial Statements include the accounts of the Trust and itssubsidiaries.  Any reference to “theTrust” throughout these Consolidated Financial Statements refers to the Trustand its subsidiaries.  All inter-entitytransactions have been eliminated.

 

**Revenue Recognition**

Revenueassociated with the sale of crude oil, natural gas, and natural gas liquids (“NGLs”)owned by the Trust are recognized when title passes from the Trust to itscustomers.

 

**Transportation**

Costspaid by the Trust for the transportation of natural gas, crude oil and NGLsfrom the wellhead to the point of title transfer are recognized when thetransportation is provided.

 

**Joint Interests**

TheTrust conducts many of its oil and gas production activities through jointlycontrolled operations and the financial statements reflect only the Trust’sproportionate interest in such activities.

 

8

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**Depletion and Depreciation**

Depletionof petroleum and natural gas properties and depreciation of productionequipment are calculated on the unit-of-production basis based on:

 

(a)   total estimated proved reserves calculated inaccordance with National Instrument 51-101, Standards of Disclosure for Oil andGas Activities;

(b)   total capitalized costs, excluding undevelopedlands, plus estimated future development costs of proved undeveloped reserves,including future estimated asset retirement costs; and

(c)   relative volumes of petroleum and natural gasreserves and production, before royalties, converted at the energy equivalentconversion ratio of six thousand cubic feet of natural gas to one barrel ofoil.

 

**Unit Based Compensation**

TheTrust established a Trust Unit Incentive Rights Plan (the “Rights Plan”) foremployees, independent directors and long-term consultants who otherwise meetthe definition of an employee of the Trust. The exercise price of the rightsgranted under the Plan may be reduced in future periods in accordance with theterms of the Plan. The Trust accounts for the rights using the fair valuemethod, whereby the fair value of rights is determined on the date on whichfair value can initially be determined. The fair value is then recorded ascompensation expense over the period that the rights vest, with a correspondingincrease to contributed surplus. When rights are exercised, the proceeds,together with the amount recorded in contributed surplus, are recorded tounitholders’ capital.

 

**Whole Trust Unit Incentive Plan Compensation**

TheTrust has established a Whole Trust Unit Incentive Plan (the “Whole Unit Plan”)for employees, independent directors and long-term consultants who otherwisemeet the definition of an employee of the Trust.  Compensation expense associated with theWhole Unit Plan is granted in the form of Restricted Trust Units (“RTUs”) andPerformance Trust Units (“PTUs”) and is determined based on the intrinsic valueof the Whole Trust Units at each period end. The intrinsic valuation method is used as participants of the Whole UnitPlan receive a cash payment on a fixed vesting date.  This valuation incorporates the year endTrust unit price, the number of RTUs and PTUs outstanding at each period end,and certain management estimates.  As aresult, large fluctuations, even recoveries, in compensation expense may occurdue to changes in the underlying trust unit price.  In addition, compensation expense isamortized and recognized in earnings over the vesting period of the Whole UnitPlan with a corresponding increase or decrease in liabilities.  Classification between accrued liabilitiesand accrued long-term incentive compensation is dependent on the expectedpayout date.

 

TheTrust charges amounts relating to head office employees to general andadministrative expense, amounts relating to field employees to operatingexpense and amounts relating to geologists and geophysicists to property, plantand equipment.

 

TheTrust has not incorporated an estimated forfeiture rate for RTUs and PTUs thatwill not vest.  Rather, the Trustaccounts for actual forfeitures as they occur.

 

**Cash Equivalents**

Cashequivalents include short-term investments, such as money market deposits orsimilar type instruments, with an original maturity of three months or lesswhen purchased.

 

**Reclamation Funds**

Reclamationfunds hold investment grade assets and cash and cash equivalents.  Investments are categorized as either held-to-maturityor available-for-sale assets, which are initially measured at fair value.  Held-to-maturity investments are subsequently measured at amortized costusing the effective interest method. Available-for-sale investments are subsequently measured at fair valuewith changes in fair value recognized in other comprehensive income, net oftax.

 

Investments carried at amortized cost aresubject to impairment losses in the event of a non-temporary decline in marketvalue.

 

**Property, Plant and Equipment (“PP&E”)**

TheTrust follows the full cost method of accounting.  All costs of exploring, developing andacquiring petroleum and natural gas properties, including asset retirementcosts, are capitalized and accumulated in one cost centre

 

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asall operations are in Canada. Maintenance and repairs are charged against earnings, and renewals andenhancements that extend the economic life of the PP&E arecapitalized.  Gains and losses are notrecognized upon disposition of petroleum and natural gas properties unless sucha disposition would alter the rate of depletion by 20 per cent or more.

 

**Impairment**

TheTrust places a limit on the aggregate carrying value of PP&E, which may beamortized against revenues of future periods.

 

Impairmentis recognized if the carrying amount of the PP&E exceeds the sum of theundiscounted cash flows expected to result from the Trust’s provedreserves.  Cash flows are calculatedbased on third party quoted forward prices, adjusted for the Trust’s contractprices and quality differentials.

 

Uponrecognition of impairment, the Trust would then measure the amount ofimpairment by comparing the carrying amounts of the PP&E to an amount equalto the estimated net present value of future cash flows from proved plus riskedprobable reserves.  The Trust’s risk-freeinterest rate is used to arrive at the net present value of the future cashflows.  Any excess carrying value abovethe net present value of the Trust’s future cash flows would be recorded as apermanent impairment and charged against net income.

 

Thecost of unproved properties is excluded from the impairment test describedabove and subject to a separate impairment test.  In the case of impairment, the book value ofthe impaired properties is moved to the petroleum and natural gas depletablebase.

 

**Goodwill**

TheTrust must record goodwill relating to a corporate acquisition when the totalpurchase price exceeds the fair value for accounting purposes of the netidentifiable assets and liabilities of the acquired company.  The goodwill balance is assessed forimpairment annually at year-end or as events occur that could result in anindication of impairment.  Impairment isrecognized based on the fair value of the reporting entity (consolidated Trust)compared to the book value of the reporting entity.  If the fair value of the consolidated Trustis less than the book value, impairment is measured by allocating the fairvalue of the consolidated Trust to the identifiable assets and liabilities asif the Trust had been acquired in a business combination for a purchase priceequal to its fair value.  The excess ofthe fair value of the consolidated Trust over the amounts assigned to theidentifiable assets and liabilities is the fair value of the goodwill.  Any excess of the book value of goodwill overthis implied fair value of goodwill is the impairment amount.  Impairment is charged to earnings in theperiod in which it occurs.

 

Goodwillis stated at cost less impairment and is not amortized.

 

**Asset Retirement Obligations**

TheTrust recognizes an Asset Retirement Obligation (“ARO”) in the period in whichit is incurred when a reasonable estimate of the fair value can be made.  On a periodic basis, management will reviewthese estimates and changes, if any, will be applied prospectively.  The fair value of the estimated ARO isrecorded as a long-term liability, with a corresponding increase in thecarrying amount of the related asset. The capitalized amount is depleted on a unit-of-production basis overthe life of the reserves.  The liabilityamount is increased each reporting period due to the passage of time and theamount of accretion is charged to earnings in the period.  Revisions to the estimated timing of cashflows or to the original estimated undiscounted cost would also result in anincrease or decrease to the ARO.  Actualcosts incurred upon settlement of the obligation are charged against the ARO tothe extent of the liability recorded.

 

**Income Taxes**

TheTrust follows the liability method of accounting for income taxes.  Under this method, income tax liabilities andassets are recognized for the estimated tax consequences attributable todifferences between the amounts reported in the financial statements of theTrust and the Trust’s corporate subsidiaries and their respective tax base,using substantively enacted future income tax rates.  The effect of a change in income tax rates onfuture tax liabilities and assets is recognized in income in the period inwhich the change occurs, provided that the income tax rates are substantivelyenacted.  Temporary differences arisingon acquisitions result in future income tax assets and liabilities.

 

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**Basic and Diluted per Trust Unit Calculations**

Basicnet income per unit is computed by dividing the net income by the weightedaverage number of trust units outstanding during the period.  Diluted net income per unit amounts arecalculated based on net income before non-controlling interest divided bydilutive trust units.  Dilutive trustunits are arrived at by adding weighted average trust units to trust unitsissuable on conversion of exchangeable shares, and to the potential dilutionthat would occur if rights were exercised at the beginning of the period.  The treasury stock method assumes thatproceeds received from the exercise of in-the-money rights and the unrecognizedtrust unit incentive compensation are used to repurchase units at the averagemarket price.

 

**Financial Instruments**

 

Financial assets, financialliabilities and non-financial derivatives are measured at fair value on initialrecognition.  Measurement in subsequentperiods depends on whether the financial instrument has been classified as held-for-trading,available-for-sale, held-to-maturity, loans and receivables, or other financialliabilities.

 

*        a. Held-for-trading*

Financial assets and liabilitiesdesignated as held-for-trading are subsequently measured at fair value withchanges in those fair values charged immediately to earnings.  With the exception of risk managementcontracts that qualify for hedge accounting, the Trust classifies all riskmanagement contracts as held-for-trading. Cash and cash equivalents are also classified as held-for-trading.

 

*        b. Available-for-sale assets*

Available-for-sale financialassets are subsequently measured at fair value with changes in fair valuerecognized in Other Comprehensive Income (“OCI”), net of tax.  Amounts recognized in OCI foravailable-for-sale financial assets are charged to earnings when the asset isderecognized or when there is an other than temporary asset impairment.

 

*        c. Held-to-maturity investments, loans andreceivables and other financial liabilities*

Held-to-maturity investments,loans and receivables, and other financial liabilities are subsequentlymeasured at amortized cost using the effective interest method.  The Trust classifies accounts receivable toloans and receivables, and accounts payable, distributions payable and long-termdebt to other financial liabilities.

 

Transaction costs are expensed asincurred for all financial instruments.

 

TheTrust has elected January 1, 2003 as the effective date to identify andmeasure embedded derivatives in financial and non-financial contracts that arenot closely related to the host contracts.

 

TheTrust is exposed to market risks resulting from fluctuations in commodityprices, foreign exchange rates and interest rates in the normal course ofoperations.  A variety of derivativeinstruments are used by the Trust to reduce its exposure to fluctuations incommodity prices, foreign exchange rates, and interest rates.  The fair values of these derivativeinstruments are based on an estimate of the amounts that would have beenreceived or paid to settle these instruments prior to maturity.  The Trust considers all of these transactionsto be effective economic hedges; however, most of the Trust’s contracts do notqualify or have not been designated as effective hedges for accountingpurposes.

 

Fortransactions that do not qualify for hedge accounting, the Trust applies thefair value method of accounting by recording an asset or liability on theConsolidated Balance Sheet and recognizing changes in the fair value of theinstruments in earnings during the current period.

 

Forderivative instruments that do qualify as effective accounting hedges, policiesand procedures are in place to ensure that the required documentation andapprovals are in place.  Thisdocumentation specifically ties the derivative financial instruments to their use,and in the case of commodities, to the mitigation of market price riskassociated with cash flows expected to be generated.  When applicable, the Trust also identifiesall relationships between hedging instruments and hedged items, as well as itsrisk management objective and the strategy for undertaking hedgetransactions.  This would include linkingthe particular derivative to specific assets and liabilities on theConsolidated Balance Sheet or to specific firm commitments or forecastedtransactions.

 

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Wherespecific hedges are executed, the Trust assesses, both at the inception of thehedge and on an ongoing basis, whether the derivative used in the particularhedging transaction is effective in offsetting changes in fair value or cashflows of the hedged item.  Hedge accounting is discontinuedprospectively when the derivative no longer qualifies as an effective hedge, orthe derivative is terminated or sold, or upon the sale or early termination of thehedged item.  The Trust has currentlydesignated a portion of its financial electricity contracts as effective cashflow hedges.

 

In a cash flow hedgingrelationship, the effective portion of the change in the fair value of thehedging derivative is recognized in OCI while the ineffective portion isrecognized in earnings.  When hedgeaccounting is discontinued, the amounts previously recognized in AccumulatedOther Comprehensive Income (“AOCI”) are reclassified to earnings during theperiods when the variability in the cash flows of the hedged item affectsearnings.  Gains and losses onderivatives are reclassified immediately to earnings when the hedged item issold or early terminated.

 

When hedge accounting is appliedto a derivative used to hedge an anticipated transaction and it is determinedthat the anticipated transaction will not occur within the originally specifiedtime period, hedge accounting is discontinued and the unrealized gains andlosses are reclassified from AOCI to earnings.

 

**Foreign Currency Translation**

Monetaryassets and liabilities denominated in a foreign currency are translated at therate of exchange in effect at the Consolidated Balance Sheet date.  Revenues and expenses are translated at theperiod average rates of exchange.  Translation gains and losses are included inearnings in the period in which they arise.

 

**Non-Controlling Interest**

TheTrust must record non-controlling interest when exchangeable shares issued by asubsidiary of the Trust are transferable to third parties.  Non-controlling interest on the ConsolidatedBalance Sheet is recognized based on the fair value of the exchangeable sharesupon issuance plus the accumulated earnings attributable to the non-controllinginterest.  Net income is reduced for theportion of earnings attributable to the non-controlling interest.  As the exchangeable shares are converted toTrust units, the non-controlling interest on the Consolidated Balance Sheet isreduced by the cumulative book value of the exchangeable shares and Unitholders’capital is increased by the corresponding amount.

 

**3.****    ****NEW ACCOUNTING POLICIES**

 

Current Year Accounting Changes

 

Effective January 1, 2008, the Trustadopted three new accounting standards that were issued by the CanadianInstitute of Chartered Accountants (“CICA”): Section 1535, CapitalDisclosures, Section 3862, Financial Instruments – Disclosures and Section 3863,Financial Instruments – Presentation.

 

*A.  Capital Disclosures*

Section 1535 establishes standards fordisclosing information regarding an entity’s capital and how it is managed.

 

*B.  Financial Instruments – Disclosures,Financial Instruments – Presentation*

Sections 3862 and 3863 establish standards forenhancing financial statements users’ understanding of the significance offinancial instruments to an entity’s financial position, performance and cashflows.  They require that entitiesprovide disclosures regarding the nature and extent of risks arising fromfinancial instruments to which they are exposed both during the reportingperiod and at the balance sheet date, as well as how the entities manage thoserisks.

 

These standards were adopted prospectively.

 

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Future Accounting Changes

 

*A.  Goodwill and Intangible Assets*

In February 2008, the CICA issued Section 3064,Goodwill and Intangible Assets, replacing Section 3062, Goodwill and OtherIntangible Assets and Section 3450, Research and Development Costs.  The new Section will be effective on January 1,2009.  Section 3064 establishes standardsfor the recognition, measurement, presentation and disclosure of goodwill andintangible assets subsequent to its initial recognition.  Standards concerning goodwill are unchangedfrom the standards included in the previous Section 3062.  The Trust is currently evaluating the impactof the adoption of this new Section, however does not expect a material impacton its consolidated financial statements.

 

*B.  International Financial Reporting Standards (“IFRS”)*

In April 2008, the CICA published the exposure draft “AdoptingIFRSs in Canada”. The exposure draft proposes to incorporate IFRSs into theCICA Accounting Handbook effective for interim and annual financial statementsrelating to fiscal years beginning on or after January 1, 2011. At thisdate, publicly accountable enterprises will be required to prepare financialstatements in accordance with IFRSs. The Trust is currently reviewing thestandards to determine the potential impact on its Consolidated FinancialStatements.  The Trust has appointed internalstaff to lead the conversion project along with sponsorship from the seniorleadership team.  In addition, anexternal advisor has been retained to assist the Trust in scoping itsconversion project.  The Trust hasperformed a diagnostic analysis that identifies differences between the Trust’scurrent accounting policies and IFRSs. At this time, the Trust is evaluating the impact of these differencesand assessing the need for amendments to existing accounting policies in orderto comply with IFRS.

 

**4.****    ****CASH AND CASH EQUIVALENTS**

 

Cash equivalents comprise $40 million inCanadian Treasury Bills as at December 31, 2008 ($7 million in cash as at December 31,2007).

 

**5.****    ****FINANCIAL ASSETS AND CREDIT RISK**

 

Credit risk is the risk offinancial loss to the Trust if a partner or counterparty to a product salescontract or financial instrument fails to meet its contractualobligations.  The Trust is exposed tocredit risk with respect to its cash equivalents, accounts receivable,reclamation funds, and risk management contracts. Most of the Trust’s accountsreceivable relate to oil and natural gas sales and are subject to typicalindustry credit risks.  The Trust manages this credit risk as follows:

 

·      By entering into sales contracts with onlyestablished credit worthy counterparties as verified by a third party ratingagency,  through internal evaluation orby requiring security such as letters of credit;

·      By limiting exposure to any one counterpartyin accordance with the Trust’s Credit Policy;

·      By restricting cash equivalent investments,reclamation fund investments, and risk management transactions tocounterparties that, at the time of transaction are not less than investmentgrade;

 

Themajority of the credit exposure on accounts receivable at December 31,2008 pertains to accrued revenue for December 2008 productionvolumes.  The Trust transacts with a number of oil and natural gasmarketing companies (“marketers”) to sell the Trust’s production on itsbehalf.  Marketers typically remitamounts to the Trust by the 25th day of the month following production.  Joint interest receivables are typicallycollected within one to three months following production.  At December 31, 2008, no one counterpartyaccounted for more than 20 per cent of the total accounts receivable balance.

 

TheTrust recorded a provision for non-collectible accounts receivable of $32million in 2008 (nil in 2007).  In July 2008,SemCanada Crude (“SemCanada”), a counterparty that marketed a portion of theTrust’s production filed for protection under the Companies’ CreditorsArrangement Act (“CCAA”).  The Trust’stotal exposure to SemCanada was $30.6 million. Due to uncertainty surrounding the ultimate recoverable amount and expectedtiming of recovery, the Trust recorded a provision for the full SemCanadareceivable of $30.6 million in 2008.  Inaddition, the Trust recorded a provision of $1.4 million for six additionalcounterparties that also filed for CCAA protection during 2008 or wereexperiencing financial distress.  TheTrust’s allowance for doubtful accounts was $32 million as at December 31,2008 (nil as at December 31, 2007).

 

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When determining whetheramounts that are past due are collectable, management assesses thecreditworthiness and past payment history of the counterparty, as well as thenature of the past due amount. ARC considers all amounts greater than 90 daysto be past due.  As at December 31,2008 $5.5 million of accounts receivable are past due, excluding amountsdescribed above, all of which are considered to be collectable.

 

Maximumcredit risk is calculated as the total recorded value of cash equivalents,accounts receivable, reclamation funds, and risk management contracts at thebalance sheet date.

 

**6.****    ****RECLAMATION FUNDS**

 
| ** **                                                          | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **Unrestricted**                | ** ** | **Restricted**                  | ** ** | **Unrestricted** | ** ** | **Restricted** | ** ** |
|                                                                | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   | ** ** |   |   | ** ** |
| Balance, beginning of year                           | ** ** | **$**                           | **14.4**   | ** **                      | **$**      | **11.7** | ** ** | $ | 24.8 | ** ** | $ | 6.1 | ** ** |
| Contributions                                                       | ** ** | **5.8**                         | ** ** | **5.9**                         | ** ** | 6.2 | ** ** | 5.9 | ** ** |
| Reimbursed expenditures (1)                                         | ** ** | **(9.7**                        | **)**      | **(1.0**                        | **)**      | (17.5 | ) | (0.6 | ) |
| Interest earned on funds                                            | ** ** | **0.8**                         | ** ** | **0.4**                         |       | 1.1 |   | 0.3 |   |
| Net unrealized gains and losses on  available-for- sale investments | ** ** | **(0.1**                        | **)**      | **—**                      |       | (0.2 | ) | — |   |
| Balance, end of year (2)                                            | ** ** | **$**                           | **11.2**   | ** **                      | **$**      | **17.0** |   | $ | 14.4 |   | $ | 11.7 |   |

 

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(1)       Amount differs from actual expenditures incurred by the Trust due totiming differences and discretionary reimbursements.

(2)       As at December 31, 2008 the unrestricted reclamation fund held nilin cash and cash equivalents ($1.5 million at December 31, 2007), with thebalance held in investment grade assets.

 

Anunrestricted reclamation fund was established to fund future asset retirementobligation costs.  In addition, the Trusthas created a restricted reclamation fund associated with the Redwater propertyacquired in 2005.  Contributions to therestricted and unrestricted reclamation funds and interest earned on thebalances have been deducted from the cash distributions to theunitholders.  The Board of Directors ofARC Resources has approved voluntary contributions to the unrestrictedreclamation fund over a 20-year period that currently results in minimum annualcontributions of $6 million ($6 million in 2007) based upon properties owned asat December 31, 2008.  Requiredcontributions to the restricted reclamation fund will vary over time and havebeen disclosed in Note 22.  Contributionsfor both funds are continually reassessed to ensure that the funds aresufficient to finance the majority of future abandonment obligations.  Interest earned on the funds is retainedwithin the funds.

 

Forthe years ended December 31, 2008 and December 31, 2007,respectively, nominal amounts relating to available-for-sale reclamation fundassets were classified from accumulated other comprehensive income intoearnings.  At December 31, 2007 thefair value of reclamation fund assets designated as held to maturityapproximated carrying value. During the fourth quarter of 2008, assetspreviously classified as held-to-maturity were reclassified toavailable-for-sale, as it was determined that the Trust no longer has theintention to hold these assets to maturity. As at December 31, 2008 all reclamation fund assets are reflectedat fair value.  The fair values areobtained from third parties, determined directly by reference to quoted marketprices.

 

**7.****    ****PROPERTY, PLANT AND EQUIPMENT**

** **
| ** **                             | ** ** | **December 31, 2008** | ** **  | **December 31, 2007** | ** ** |
|----------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| Property, plant and equipment, at cost | ** ** | **$**                           | 5,668.9     |                            | $          | 5,065.0 |   |
| Accumulated depletion and depreciation |       | (2,292.3                        | )           | (1,922.0                        | )          |
| Property, plant and equipment, net     | ** ** | **$**                           | **3,376.6** |                            | $          | 3,143.0 |   |

 

Thecalculation of 2008 depletion and depreciation included an estimated $872million ($549 million in 2007) for future development costs associated withproved undeveloped reserves and excluded $287.5 million ($173.7 million in2007) for the book value of unproved properties.

 

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TheTrust performed a ceiling test calculation at December 31, 2008 to assessthe recoverable value of property plant and equipment (“PP&E”).  Based on the calculation, the value of futurenet revenues from the Trust’s reserves exceeded the carrying value of the Trust’sPP&E at December 31, 2008.  Thebenchmark prices used in the calculation were as follows:

 
| ** **    | ** ** | **WTI Oil** | ** ** | **AECO Gas** | ** ** | **Cdn$/US$**            | ** ** |
|---------------|------------|------------------|------------|-------------------|------------|-------------------------|------------|
| **Year**      | ** ** | **(US$/bbl)**    | ** ** | **(Cdn$/mmbtu)**  | ** ** | **Exchange Rates** | ** ** |
| 2009          |       | 57.50            |       | 7.58              |       | 1.21                    |       |
| 2010          |       | 68.00            |       | 7.94              |       | 1.18                    |       |
| 2011          |       | 74.00            |       | 8.34              |       | 1.14                    |       |
| 2012          |       | 85.00            |       | 8.70              |       | 1.08                    |       |
| 2013          |       | 92.01            |       | 8.95              |       | 1.05                    |       |
| 2014          |       | 93.85            |       | 9.14              |       | 1.05                    |       |
| 2015          |       | 95.73            |       | 9.34              |       | 1.05                    |       |
| 2016          |       | 97.64            |       | 9.54              |       | 1.05                    |       |
| 2017          |       | 99.59            |       | 9.75              |       | 1.05                    |       |
| 2018          |       | 101.59           |       | 9.95              |       | 1.05                    |       |
| 2019          |       | 103.62           |       | 10.15             |       | 1.05                    |       |
| Remainder (1) |       | 2.0              | %          | 2.0               | %          | 1.05                    |       |

 

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(1)  Percentage change represents thechange in each year after 2019 to the end of the reserve life.

 

**8****.****             ****LONG-TERM INVESTMENT**

 

In 2007 the Trust sold its equity investment ina private oil sands company for proceeds of $33.3 million, resulting in a gainon sale of investment of $13.3 million. The original investment was purchased in 2006 for $20 million.  The investment in the shares of the privatecompany was considered to be a related party transaction due to common directorshipsof the Trust, the private company and the manager of a private equity fund thatheld shares in the private company. In addition, certain directors and officersof the Trust had minor direct and indirect shareholdings in the privatecompany.

 

**9.****             ****FINANCIAL LIABILITIES ANDLIQUIDITY RISK**

 

Liquidityrisk is the risk that the Trust will not be able to meet its financialobligations as they become due. The Trust actively manages its liquiditythrough cash, distribution policy, and debt and equity management strategies.Such strategies include continuously monitoring forecasted and actual cashflows from operating, financing and investing activities, available creditunder existing banking arrangements and opportunities to issue additional Trustunits.  Management believes that futurecash flows generated from these sources will be adequate to settle the Trust’sfinancial liabilities.

 

The following table details the Trust’sfinancial liabilities as at December 31, 2008:

** **
| **($ millions)**                        | ** ** | **1 year** | ** ** | **2 - 3   years** | ** ** | **4 - 5   years** | ** ** | **Beyond  5 years** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------|------------|-----------|------------|
| Accounts payable and accrued liabilities (1) |       | 198.1           |       | —                           |       | —                           |       | —                   |       | 198.1     |       |
| Distributions payable (2)                    |       | 25.6            |       | —                           |       | —                           |       | —                   |       | 25.6      |       |
| Risk management contracts (3)                |       | 24.3            |       | 6.4                              |       | 0.3                              |       | —                   |       | 31.0      |       |
| Senior secured notes and interest            |       | 33.0            |       | 78.0                             |       | 187.6                            |       | 21.6                     |       | 320.2     |       |
| Revolving credit facilities                  |       | —          |       | 642.2                            |       | —                           |       | —                   |       | 642.2     |       |
| Accrued long-term incentive compensation (1) |       | —          |       | 37.1                             |       | —                           |       | —                   |       | 37.1      |       |
| Total financial liabilities                  |       | 281.0           |       | 763.7                            |       | 187.9                            |       | 21.6                     |       | 1,254.2   |       |

 

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(1)                      Liabilities underthe Whole Trust Unit Incentive Plan represent the total amount expected to bepaid out on vesting.

(2)                      Amounts payable forthe distribution represents the net cash payable after distributionreinvestment.

(3)                      Amounts payable forthe risk management contracts have been included at their intrinsic value.

 

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TheTrust actively maintains credit and working capital facilities to ensure thatit has sufficient available funds to meet its financial requirements at areasonable cost.  Refer to Note 10 forfurther details on available amounts under existing banking arrangements andNote 12 for further details on capital management.

 

**10.****      ****LONG-TERM DEBT**

** **
| ** **                                              | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Revolving credit facilities                             |       |                            |       |                            |       |
| Syndicated credit facility – Cdn$ denominated | ** ** | **$**                           | **399.5**  |                            | $          | 344.9 |   |
| Syndicated credit facility – US$ denominated  | ** ** | **240.6**                       |       | 154.1                           |       |
| Working capital facility (1)                            | ** ** | **2.1**                         |       | —                          |       |
| Senior secured notes                                    |       |                            |       |                            |       |
| 5.42% US$ Note                                     | ** ** | **91.9**                        |       | 74.1                            |       |
| 4.94% US$ Note                                     | ** ** | **14.7**                        |       | 17.8                            |       |
| 4.62% US$ Note                                     | ** ** | **76.5**                        |       | 61.8                            |       |
| 5.10% US$ Note                                     | ** ** | **76.5**                        |       | 61.8                            |       |
| Total long-term debt outstanding                        | ** ** | **$**                           | **901.8**  |                            | $          | 714.5 |   |

 

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(1)                   Amount borrowed under the working capitalfacility comprises $2.1 million of outstanding cheques in excess of bankbalance.

 

**Revolving Credit Facilities**

During2008, the Trust renewed its $800 million secured, annually extendible,financial covenant-based syndicated credit facility.  The revolving credit facility’s security isin the form of a floating charge on all lands and assignments and a negativepledge on petroleum and natural gas properties. The Trust also has in place a $25 million demand working capitalfacility.

 

Borrowingsunder the credit facility bear interest at bank prime (four per cent at December 31,2008 and six percent at December 31, 2007) or, at the Trust’s option,Canadian dollar bankers’ acceptances or U.S. dollar LIBOR loans, plus astamping fee.  At the option of the Trust, the lenders will review thecredit facility each year and determine whether they will extend the revolvingperiod for another year.  In the event that the credit facility is notextended at anytime before the maturity date, the loan balance will becomerepayable on the maturity date.  Thematurity date of the current credit facility is April 15, 2011.  All drawings under the facility are subjectto stamping fees depending on the ratio of consolidated long-term debt andletters of credit to annualized net income before non-cash items and interestexpense.  These stamping fees varybetween a minimum of 60 basis points (“bps”) at a ratio of less than one to amaximum of 110 bps at a ratio exceeding 2.5.

 

Theworking capital facility allows for maximum borrowings of $25 million and isdue and payable immediately upon demand by the bank.  The facility is secured and is subject to thesame covenants as the syndicated credit facility.

 

**5.42 Per Cent and 4.94 Per Cent Senior Secured US$ Notes**

Thesesenior secured notes were issued in two separate issues pursuant to anUncommitted Master Shelf Agreement.  TheUS$12 million senior secured notes were issued in 2002, bear interest at 4.94per cent, have a remaining final term of 1.8 years (remaining average term of1.3 years) and require equal principal repayments of US$6 million in 2009 and2010.  The US$75 million senior securednotes were issued in 2005, bear interest at 5.42 per cent, have a remainingfinal term of nine years (remaining weighted average term of 5.5 years) andrequire equal principal repayments of US$9.4 million over an eight year periodcommencing in 2010.

 

**4.62 Per Cent and 5.10 Per Cent Senior Secured US$ Notes**

These notes were issued on April 27, 2004 via aprivate placement in two tranches of US$62.5 million each. The first tranche ofUS$62.5 million bears interest at 4.62 per cent and has a remaining final termof 5.3 years (remaining weighted average term of 2.9 years) and requires equalprincipal repayments of US$10.4 million over a six year period commencing in2009. Immediately following the issuance, the Trust entered into interest rateswap contracts which effectively changed the interest rate from fixed tofloating (see Note 13).  The second

 

16

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tranche of US$62.5 million bears interest at 5.10 percent and has a remaining final term of 7.3 years (remaining weighted averageterm of 5.4 years). Repayment of the notes will occur in equal principalrepayments of US$12.5 million over a five year period commencing in 2012.

 

**Debt Covenants**

Thefollowing are the significant financial covenants governing the revolvingcredit facilities:

 

·                  Long-term debt and letters of credit not toexceed three times annualized net income before non-cash items and interestexpense;

·                  Long-term debt, letters of credit, andsubordinated debt not to exceed four times annualized net income beforenon-cash items and interest expense; and

·                  Long-term debt and letters of credit not toexceed 50 per cent of the book value of unitholders’ equity and long-term debt,letters of credit, and subordinated debt.

 

Inthe event that the Trust enters into a material acquisition whereby thepurchase price exceeds 10 per cent of the book value of the Trust’s assets, theratios in the first two covenants above are increased to 3.5 and 5.5 timesrespectively, while the third covenant is increased to 55% for the subsequentsix month period.  As at December 31,2008, the Trust had $1.9 million in letters of credit ($4.8 million in 2007),no subordinated debt, and was in compliance with all covenants.

 

Thepayment of principal and interest are allowable deductions in the calculationof cash available for distribution to unitholders and rank ahead of cashdistributions payable to unitholders. Should the properties securing this debt generate insufficient revenueto repay the outstanding balances, the unitholders have no direct liability.

 

During 2008, the weighted-average effective interestrate under the credit facility was 3.8 per cent (5.5 per cent in 2007).

 

Amountsof US$16.4 million due under the senior secured notes and $2.1 million dueunder the Trust’s working capital facility in the next 12 months have not beenincluded in current liabilities as management has the ability and intent torefinance this amount through the syndicated credit facility.  The fair value of senior secured notes as at December 31,2008 is $289.9 million ($226.1 million as at December 31, 2007), and iscalculated as the present value of principal and interest payments discountedat the Trust’s credit adjusted risk free rate.

 

Interestpaid during 2008 was $1.6 million more than interest expense, $1.8 million lessin 2007.

 

**11.****      ****ASSET RETIREMENT OBLIGATIONS**

 

Thetotal future asset retirement obligations were estimated by management based onthe Trust’s net ownership interest in all wells and facilities, estimated coststo reclaim and abandon the wells and facilities and the estimated timing of thecosts to be incurred in future periods. The Trust has estimated the net present value of its total assetretirement obligations to be $141.5 million as at December 31, 2008 ($140million in 2007) based on a total future undiscounted liability of $1.32billion ($1.29 billion in 2007).  At December 31,2008 management estimates that these payments are expected to be made over thenext 51 years with the majority of payments being made in years 2049 to2059.  The Trust’s weighted averagecredit adjusted risk free rate of 6.6 per cent (6.6 per cent in 2007) and aninflation rate of 2.0 per cent (2.0 per cent in 2007) were used to calculatethe present value of the asset retirement obligations.  During the year, no gains or losses wererecognized on settlements of asset retirement obligations.

 

17

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The following tablereconciles the Trust’s asset retirement obligations:

 
| ** **                                                         | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Balance, beginning of year                                         | ** ** | **$**                           | **140.0**  |                            | $          | 177.3 |   |
| Increase in liabilities relating to  development activities        | ** ** | **2.0**                         |       | 3.8                             |       |
| Increase (decrease) in liabilities relating  to change in estimate | ** ** | **2.6**                         |       | (34.4                           | )          |
| Settlement of liabilities during the year                          | ** ** | **(12.4**                       | **)**      | (18.2                           | )          |
| Accretion expense                                                  | ** ** | **9.3**                         |       | 11.5                            |       |
| Balance, end of year                                               | ** ** | **$**                           | **141.5**  |                            | $          | 140.0 |   |

 

**12.****      ****CAPITAL MANAGEMENT**

 

TheTrust’s objectives when managing its capital is to maintain a conservativecapital structure which will allow the Trust to:

 

·                  Fundits development and exploration program;

·                  Providefinancial flexibility to execute on strategic opportunities;

·                  Maintaina level of distributions that, in normal times, in the opinion of Managementand the Board of Directors, is sustainable for a minimum period of six monthsin order to normalize the effect of commodity price volatility to unitholders;and

·                  Maintaina level of distributions which will transfer tax liabilities to unitholders andminimize taxes paid by the Trust.

 

TheTrust manages the following capital:

 

·                  Trustunits and exchangeable shares;

·                  Long-termdebt; and

·                  Workingcapital (defined as current assets less current liabilities excluding riskmanagement contracts and future income taxes).

 

Whenevaluating the Trust’s capital structure, management’s objective is to limitnet debt to less than 2.0 times annualized cash flow from operating activitiesand 20 per cent of total capitalization. As at December 31, 2008 the Trust’snet debt to annualized cash flow from operating activities ratio is 1.0 and itsnet debt to total capitalization ratio is 17.9 per cent.

 
| **($ millions except per unit and per cent amounts)** | ** ** | **December 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Long-term debt                                                                                | ** ** | **901.8**                         | ** ** | 714.5                             |       |
| Accounts payable and accrued liabilities                                                      | ** ** | **194.4**                         | ** ** | 180.6                             |       |
| Distributions payable                                                                         | ** ** | **32.5**                          | ** ** | 42.1                              |       |
| Cash and cash equivalents, accounts  receivable and prepaid expenses                          | ** ** | **(166.8**                        | **)**      | (184.5                            | )          |
| Net debt obligations (1)                                                                      | ** ** | **961.9**                         | ** ** | 752.7                             |       |
|                                                                                          |       |                              | ** ** |                              |       |
| Trust units outstanding and issuable for  exchangeable shares (millions)                      | ** ** | **219.2**                         | ** ** | 213.2                             |       |
| Trust unit price                                                                              | ** ** | **20.10**                         | ** ** | 20.40                             |       |
| Market capitalization (1)                                                                     | ** ** | **4,405.9**                       | ** ** | 4,349.3                           |       |
| Net debt obligations (1)                                                                      | ** ** | **961.9**                         | ** ** | 752.7                             |       |
| Total capitalization (1)                                                                      | ** ** | **5,367.8**                       | ** ** | 5,102.0                           |       |
|                                                                                          |       |                              | ** ** |                              |       |
| Net debt as a percentage of total  capitalization                                             | ** ** | **17.9**                          | **%**      | 14.8                              | %          |
| Net debt obligations to annualized cash  flow from operating activities                       | ** ** | **1.0**                           | ** ** | 1.1                               |       |

 

----

(1)                     Market capitalization, net debt obligationsand total capitalization as presented do not have any standardized meaningprescribed by Canadian GAAP and therefore may not be comparable with thecalculation of similar measures for other entities.

 

18

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TheTrust manages its capital structure and makes adjustments to it in response tochanges in economic conditions and the risk characteristics of the underlyingassets.  The Trust is able to change itscapital structure by issuing new trust units, exchangeable shares, new debt orchanging its distribution policy.

 

Asa result of the volatility of oil prices throughout 2008, the Trust made severalchanges to the monthly distribution amounts declared and paid tounitholders.  During the first sevenmonths of 2008, oil prices soared to record high amounts causing the Trust toincrease monthly distributions to $0.28 per unit in order to meet the Trust’sobjective of transferring tax liabilities to unitholders and minimizing taxespaid by the Trust.  In the third quarterof 2008, oil prices decreased significantly causing the Trust to reducedistributions to $0.15 per unit. Subsequent to year end, the Trust further decreased distributions to$0.12 per unit in light of the continued weak commodity price environment.

 

Inaddition to internal capital management the Trust is subject to variouscovenants under its credit facilities. Compliance with these covenants is monitored on a quarterly basis and asat December 31, 2008 the Trust is in compliance with all covenants.  Refer to Note 10 for further details.

 

**13.****      ****MARKET RISK MANAGEMENT**

 

TheTrust is exposed to a number of market risks that are part of its normal courseof business.  The Trust has a riskmanagement program in place that includes financial instruments as disclosed inthe risk management section of this note. Financial instruments of the Trust carried on the Consolidated BalanceSheet are carried at amortized cost with the exception of cash and cashequivalents, reclamation fund assets classified as available-for-sale and riskmanagement contracts, which are carried at fair value.  With the exception of the Trust’s seniorsecured notes, there were no significant differences between the carrying valueof financial instruments and their estimated fair values as at December 31,2008.  The fair value of the Trust’ssenior secured notes is disclosed in Note 10.

 

ARC’s risk management program is overseen by its Risk Committee based onguidelines approved by the Board of Directors. The objective of the risk management program is to support the Trust’sbusiness plan by mitigating adverse changes in commodity prices, interest ratesand foreign exchange rates.

 

Inthe sections below, management has prepared sensitivity analyses in an attemptto demonstrate the effect of changes in these market risk factors on the Trust’snet income.  For the purposes of thesensitivity analyses, the effect of a variation in a particular variable iscalculated independently of any change in another variable.  In reality, changes in one factor maycontribute to changes in another, which may magnify or counteract thesensitivities.  For instance, trends haveshown a correlation between the movement in the foreign exchange rate of theCanadian dollar to the U.S. dollar and the West Texas Intermediate posting (“WTI”)crude oil price.

 

*Commodity price risk*

 

The Trust’s operationalresults and financial condition, and therefore the amount of distributions paidto unitholders, are largely dependent on the commodity prices received for oiland natural gas production. Commodity prices have fluctuated widely duringrecent years due to global and regional factors including supply and demandfundamentals, inventory levels, weather, economic, and geopolitical factors.Movement in commodity prices could have a significant positive or negativeimpact on distributions to unitholders.

 

ARC manages the risksassociated with changes in commodity prices by entering into a variety of riskmanagement contracts (see Risk Management Contracts below).  The following table illustrates the effectsof movement in commodity prices on net income due to changes in the fair valueof risk management contracts in place at December 31, 2008. Thesensitivity is based on a $15 increase and $15 decrease in the price of US$ WTIcrude oil and $2 increase and $2 decrease in the price of Cdn$ AECO naturalgas. The commodity price assumptions are based on management’s assessment ofreasonably possible changes in oil and natural gas prices that could occurbetween December 31, 2008 and the Trust’s next reporting date (March 31,2009).

 
| ** **                     | ** ** | **Increase in Commodity Price** | ** ** | **Decrease in Commodity Price** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| **($ millions)**          | ** ** | **Crude oil**                             | ** ** | **Natural gas**                           | ** ** | **Crude oil** | ** ** | **Natural gas** | ** ** |
| Net income (decrease) increase |       | (2.2                                           | )          | (1.0                                           | )          | 3.3 |   | 1.6 |   |

 

19

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Asnoted above, the sensitivities are hypothetical and based on management’sassessment of reasonably possible changes in commodity prices between thebalance sheet date and the Trust’s next reporting date.  The results of the sensitivity should not beconsidered to be predictive of future performance.  Changes in the fair value of risk managementcontracts cannot generally be extrapolated because the relationship of changein certain variables to a change in fair value may not be linear.

 

*Interest Rate Risk*

 

The Trust has both fixed andvariable interest rates on its debt. Changes in interest rates could result ina significant increase or decrease in the amount the Trust pays to servicevariable interest rate debt, potentially impacting distributions tounitholders. Changes in interest rates could also result in fair value risk onthe Trust’s fixed rate senior secured notes. Fair value risk of the seniorsecured notes is mitigated due to the fact that the Trust does not intend tosettle its fixed rate debt prior to maturity.

 

If interest rates applicableto floating rate debt and interest rate swaps were to have increased by 100 bps(1 per cent) it is estimated that the Trust’s net income for the year ended December 31,2008 would decrease by $6.4 million, of which $4.8 million is the result ofincreased interest expense and $1.6 million is due to the change in fair valueof risk management contracts in place at December 31, 2008.  An opposite change in interest rates willresult in an opposite impact on net income.

 

*Foreign Exchange Risk*

 

North American oil andnatural gas are based upon U.S. dollar denominated commodity prices.  As a result, the price received by Canadianproducers is affected by the Canadian/U.S. dollar exchange rate that mayfluctuate over time. In addition the Trust has US$ denominated debt of whichfuture cash repayments are directly impacted by the exchange rate in effect onthe repayment date.  Variations in theexchange rate of the Canadian dollar could also have a significant positive ornegative impact on distributions to unitholders.

 

As at December 31, 2008no risk management contracts pertaining to foreign exchange were outstanding.

 

If foreign exchange ratesapplicable to U.S. denominated debt were to have increased or decreased by$0.10Cdn$/US$ it is estimated that the Trust’s net income for the year ended December 31,2008 would decrease by $29 million or increase by $32 million,respectively.  Increases and decreases inforeign exchange rates applicable to US$ payables and receivables would have anominal impact on the Trust’s net income for the year ended December 31,2008.

 

**Risk Management Contracts**

 

TheTrust uses a variety of derivative instruments to reduce its exposure tofluctuations in commodity prices, foreign exchange rates, interest rates andpower prices.  The Trust considers all ofthese transactions to be effective economic hedges; however, the majority ofthe Trust’s contracts do not qualify as effective hedges for accountingpurposes.

 

20

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Following is a summary of all risk management contracts in place as at December 31,2008 that do not qualify for hedge accounting:

 
| **Financial WTI Crude Oil Contracts In Conjunction with 2005 Redwater and North Pembina Cardium Unit Acquisition ****(1)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **   | ** ** | **Volume** | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** | **Sold Call** | ** ** |
|----------------------|------------|--------------|------------|------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **Bbl/d**  | ** ** | **US$/bbl**         | ** ** | **US$/bbl**       | ** ** | **US$/bbl**        | ** ** |
| Jan 09 – Dec 09 |       | Put Spread   |       | 2,500      |       | 55.00               |       | 40.00             |       | —             |       |

 

----

(1)                    Monthly average

 
| **Financial AECO Natural Gas Option Contracts ****(2)** | ** ** |
|---------------------------------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **          | ** ** | **Volume** | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** | **Sold Call** | ** ** |
|----------------------|------------|---------------------|------------|------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| **Term**             | ** ** | **Contract**        | ** ** | **GJ/d**   | ** ** | **Cdn$/GJ**         | ** ** | **Cdn$/GJ**       | ** ** | **Cdn$/GJ**        | ** ** |
| Jan 09 – Dec 09 |       | 3 – Way Collar |       | 20,000     |       | 6.50                |       | 4.50              |       | 8.00               |       |

 

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(2)                    AECO 7a monthly index

** **
| **Financial NYMEX Natural Gas Contracts ****(3)** | ** ** |
|----------------------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **   | ** ** | **Volume**  | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** | **Sold Call** | ** ** |
|----------------------|------------|--------------|------------|-------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **mmbtu/d** | ** ** | **US$/mmbtu**       | ** ** | **US$/mmbtu**     | ** ** | **US$/mmbtu**      | ** ** |
| Jan 09 – Mar 09 |       | Collar       |       | 20,000      |       | 8.50                |       | —            |       | 11.00              |       |
| Jan 09 – Mar 09 |       | Collar       |       | 10,000      |       | 9.00                |       | —            |       | 12.00              |       |
| Jan 09 – Mar 09 |       | Collar       |       | 10,000      |       | 9.25                |       | —            |       | 12.00              |       |

 

----

(3)                    Last 3 Day

** **
| **Financial Basis Swap Contract ****(4)** | ** ** |
|---------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **     | ** ** | **Volume**  | ** ** | **Basis Swap** | ** ** |
|----------------------|------------|----------------|------------|-------------|------------|---------------------|------------|
| **Term**             | ** ** | **Contract**   | ** ** | **mmbtu/d** | ** ** | **US$/mmbtu**       | ** ** |
| Jan 09 – Oct 10 |       | Basis Swap-L3d |       | 50,000      |       | (1.0430             | )          |
| Nov 10 – Oct 11 |       | Basis Swap-Ld  |       | 20,000      |       | (0.4850             | )          |
| Nov 11 – Oct 12 |       | Basis Swap-Ld  |       | 20,000      |       | (0.4050             | )          |

 

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(4)                      Receive Nymex Last Day (Ld) or Last 3 Day(L3d); pay AECO Monthly 7a

** **
| **Financial Interest Rate Contracts ****(5) (6)** | ** ** |
|----------------------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **   | ** ** | **Principal**   | ** ** | **Fixed Annual** | ** ** | **Spread on**        | ** ** |
|----------------------|------------|--------------|------------|-----------------|------------|-----------------------|------------|---------------------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **MM US$** | ** ** | **Rate %**       | ** ** | **3 Mo. LIBOR** | ** ** |
| Jan 09 – Apr 14 |       | Swap         |       | 30.5            |       | 4.62                  |       | 38 bps                    |       |
| Jan 09 – Apr 14 |       | Swap         |       | 32.0            |       | 4.62                  |       | (25.5 bps                 | )          |

 

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(5)                   Starting in 2009, the notional amount of thecontracts decreases annually until 2014. The Trust pays the floating interest rate based on a three month LIBORplus a spread and receives the fixed interest rate.

(6)                     Starting in 2009, a mutual put exists whereboth parties have the right to call on the other party to pay the then currentmark-to-market value of the contract.

** **
| **Financial Electricity Heat Rate Contracts ****(7)** | ** ** |
|--------------------------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **     | ** ** | ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | ** **     | ** ** | **Heat**   | ** ** |
|----------------------|------------|----------------|------------|------------|------------|---------------------|------------|--------------------|------------|----------------|------------|------------|------------|
| ** **           | ** ** | ** **     | ** ** | **Volume** | ** ** | **AESO Power** | ** ** | **AECO 5(a)** | ** ** | **multiplied** | ** ** | **Rate**   | ** ** |
| **Term**             | ** ** | **Contract**   | ** ** | **MWh**    | ** ** | **$/MWh**           | ** ** | **$/GJ**           | ** ** | **by**         | ** ** | **GJ/MWh** | ** ** |
| Jan 10 – Dec 13 |       | Heat Rate Swap |       | 5.0        |       | Receive AESO        |       | Pay AECO           |       |           |       | 9.0        |       |

 

----

(7)                      Alberta Power Pool (monthly average 24x7),AECO Monthly (5a)

 
| **Financial Electricity Contracts ****(8)** | ** ** |
|------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **   | ** ** | **Volume** | ** ** | **Swap**     | ** ** |
|----------------------|------------|--------------|------------|------------|------------|--------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **MWh**    | ** ** | **Cdn$/MWh** | ** ** |
| Jan 09 – Dec 12 |       | Swap         |       | 5.0        |       | 72.50        |       |

 

Following is a summary of all risk management contracts in place as at December 31,2008 that qualify for hedge accounting:

 

21

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| **Financial Electricity Contracts ****(8)** | ** ** |
|------------------------------------------------------------|------------|

 
| ** **           | ** ** | ** **   | ** ** | **Volume** | ** ** | **Swap**     | ** ** |
|----------------------|------------|--------------|------------|------------|------------|--------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **MWh**    | ** ** | **Cdn$/MWh** | ** ** |
| Jan 09 – Dec 09 |       | Swap         |       | 15.0       |       | 59.33        |       |
| Jan 10 – Dec 10 |       | Swap         |       | 5.0        |       | 63.00        |       |

 

----

(8)                    Contracted volume is based on a 24/7 term.

 

At December 31, 2008, the fair value of the contracts that were notdesignated as accounting hedges was a gain of $3.4 million.  The Trust recorded a loss on risk managementcontracts of $7.7 million in the statement of income for the year ended December 31,2008 ($41.8 million loss in 2007).  Thisamount includes the realized and unrealized gains and losses on risk managementcontracts that do not qualify as effective accounting hedges.

 

Thefollowing table reconciles the movement in the fair value of the Trust’sfinancial risk management contracts that have not been designated as effectiveaccounting hedges:

 
| ** **                                     | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Fair value, beginning of year                  | ** ** | **$**                           | **(64.6**  | **)**                           | $          | (8.7 | ) |
| Fair value, end of year (1)                    | ** ** | **3.4**                         | ** ** | (64.6                           | )          |
| Change in fair value of contracts in the  year | ** ** | **68.0**                        | ** ** | (55.9                           | )          |
| Realized (loss) gain in the year               | ** ** | **(75.7**                       | **)**      | 14.1                            |       |
| Loss on risk management contracts              | ** ** | **$**                           | **(7.7**   | **)**                           | $          | (41.8 | ) |

 

----

(1)                           Intrinsic value of risk management contractsnot designated as effective accounting hedges equals a loss of $0.9 million at December 31,2008 ($47.6 million loss at December 31, 2007).

 

During2007 the Trust entered into treasury rate lock contracts in order to manage theTrust’s interest rate exposure on future debt issuances.  During 2008 it was determined that thepreviously anticipated debt issuance was no longer expected to occur and theassociated rate lock contracts were unwound at a cost of $13.6 million.  These contracts were designated as effectiveaccounting hedges on their respective contract dates and hedge accounting wasapplied.  During 2008, the $13.6 million loss was reclassified from OCI,net of tax and recognized in net income.

 

TheTrust’s electricity contracts are intended to manage price risk on electricityconsumption.  Portions of the Trust’sfinancial electricity contracts were designated as effective accounting hedges ontheir respective contract dates. A realized gain of $3.9 million for the twelvemonths ended December 31, 2008 (gain of $0.4 million in 2007) has beenincluded in operating costs on these electricity contracts. The unrealized fairvalue gain of $3.3 million on these contracts has been recorded on theConsolidated Balance Sheet at December 31, 2008 with the movement in fairvalue recorded in OCI, net of tax. The fair value movement for the year ended December 31,2008 is an unrealized loss of $0.7 million. As at December 31, 2008 $2.5 million of the unrealized fair valuegain is attributed to contracts that will settle in 2009.

 

Thefollowing table reconciles the movement in the fair value of the Trust’sfinancial risk management contracts that have been designated as effectiveaccounting hedges:

 
| ** **                                                                    | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Fair value, beginning of year (1)                                             | ** ** | **$**                           | **(3.4**   | **)**                           | $          | 7.0 |   |
| Change in fair value of financial  electricity contracts                      | ** ** | **(0.7**                        | **)**      | (10.4                           | )          |
| Change in fair value of treasury rate lock  contracts prior to de-designation | ** ** | **(6.2**                        | **)**      | —                          |       |
| Reclassification of loss on treasury rate  lock contracts to net income       | ** ** | **13.6**                        | ** ** | —                          |       |
| Fair value, end of year (2)                                                   | ** ** | **$**                           | **3.3**    | ** **                      | $          | (3.4 | ) |

 

----

(1)                     Includes $7.4 million unrealized loss ontreasury rate lock contracts and $4 million unrealized gain on electricitycontracts.

(2)                     Intrinsic value of risk management contractsdesignated as effective accounting hedges equals a gain of $3.4 million at December 31,2008 ($3.5 million loss at December 31, 2007).

 

22

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All of the Trust’s risk management contracts are transacted in liquidmarkets; fair values are determined using a valuation model based on published,third party, and market based price and rate information.

 

**14.****      ****(LOSS) GAIN ON FOREIGNEXCHANGE**

 

Thefollowing is a summary of the total (loss) gain on US$ denominatedtransactions:

** **
| ** **                                                       | ** ** | **December 31** | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| Unrealized (loss) gain on US$ denominated  debt             | ** ** | **$**                | **(90.8**  | **)**                | $          | 64.6 |   |
| Realized gain on US$ denominated debt  repayments           | ** ** | **2.3**              | ** ** | 5.0                  |       |
| Total non-cash (loss) gain on US$ denominated  transactions | ** ** | **(88.5**            | **)**      | 69.6                 |       |
| Realized cash gain (loss) on US$ denominated  transactions  | ** ** | **(0.9**             | **)**      | (0.2                 | )          |
| Total foreign exchange (loss) gain                               | ** ** | **$**                | **(89.4**  | **)**                | $          | 69.4 |   |

 

**15.****      ****INCOME TAXES**

 

In 2007, Income Trust tax legislation was passed resulting in atwo-tiered tax structure subjecting distributions to the federal corporateincome tax rate plus a deemed 13 per cent provincial income tax at the Trustlevel commencing in 2011.  On February 26,2008 the Federal Government announced as part of the Federal budget that theprovincial component of the tax on the Trust is to be calculated based on thegeneral provincial rate in each province in which the Trust has a permanentestablishment.  This is the same way thata corporation would calculate its provincial tax rate.  On February 1, 2009 the Minister ofFinance tabled a Notice of Ways and Means which includes the proposedlegislation for calculating the provincial tax rate. As the proposed rules werenot substantively enacted as of December 31, 2008, the Trust has notreflected a reduced tax rate in the calculation of future income taxes in 2008.

 

Thetax provision differs from the amount computed by applying the combinedCanadian federal and provincial statutory income tax rates to income beforefuture income tax recovery as follows:

 
| ** **                                                             | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Income before future income tax recovery  and non-controlling interest | ** ** | **$**                           | **535.4**  | ** **                      | $          | 380.8 |   |
| Canadian statutory rate (1)                                            | ** ** | **32.4**                        | **%**      | 34.3                            | %          |
| Expected income tax expense at statutory  rates                        | ** ** | **173.4**                       | ** ** | 130.6                           |       |
| Effect on income tax of:                                               |       |                            | ** ** |                            |       |
| Net income of the Trust                                                | ** ** | **(181.2**                      | **)**      | (163.6                          | )          |
| Effect of change in corporate tax rate                                 | ** ** | **(8.9**                        | **)**      | (41.3                           | )          |
| Initial recognition of Trust tax pools                                 | ** ** | **—**                      | ** ** | (24.7                           | )          |
| Unrealized loss (gain) on foreign exchange                             | ** ** | **13.4**                        | ** ** | (10.4                           | )          |
| Change in estimated pool balances                                      | ** ** | **(1.0**                        | **)**      | (7.0                            | )          |
| Non-taxable portion of gains/losses                                    | ** ** | **—**                      | ** ** | (2.1                            | )          |
| Other non-deductible items                                             | ** ** | **(0.2**                        | **)**      | (2.8                            | )          |
| Future income tax recovery                                             | ** ** | **$**                           | **(4.5**   | **)**                           | $          | (121.3 | ) |

 

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(1)          The statutory rate consists of the combinedTrust and Trust’s subsidiaries statutory tax rate

 

23

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Thenet future income tax liability is comprised of the following:

 
| ** **                                             | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Future tax liabilities:                                |       |                            | ** ** |                            |       |
| Capital assets in excess of tax value                  | ** ** | **$**                           | **381.4**  | ** **                      | $          | 371.6 |   |
| Risk management contracts                              | ** ** | **1.7**                         | ** ** | —                          |       |
| Other comprehensive income (loss)                      | ** ** | **0.8**                         | ** ** | (0.7                            | )          |
| Long-term debt                                         | ** ** | **0.2**                         | ** ** | 11.9                            |       |
| Future tax assets:                                     |       |                            | ** ** |                            |       |
| Asset retirement obligations                           | ** ** | **(35.8**                       | **)**      | (36.1                           | )          |
| Non-capital losses                                     | ** ** | **(24.4**                       | **)**      | (3.8                            | )          |
| Risk management contracts                              | ** ** | **—**                      | ** ** | (16.7                           | )          |
| Trust unit incentive compensation expense              | ** ** | **(8.3**                        | **)**      | (7.8                            | )          |
| Attributed Canadian royalty income                     | ** ** | **(4.6**                        | **)**      | (4.6                            | )          |
| CEC, SR&ED pools and deductible share  issue costs | ** ** | **(1.6**                        | **)**      | (1.6                            | )          |
| Net future income tax liability                        | ** ** | **$**                           | **309.4**  | ** **                      | $          | 312.2 |   |
| Future income tax (asset)                              | ** ** | **$**                           | **(3.9**   | **)**                           | $          | (4.0 | ) |
| Future income tax liability                            | ** ** | **$**                           | **313.3**  | ** **                      | $          | 316.2 |   |

 

Thepetroleum and natural gas properties and facilities owned by the Trust have anapproximate tax basis of $2.07 billion ($1.84 billion in 2007) available forfuture use as deductions from taxable income. Included in this tax basis are estimated non-capital loss carry forwardsof $86.9 million ($13.8 million in 2007) that expire in the years 2010 through2027. The following is a summary of the estimated Trust’s tax pools:

 
| ** **                             | ** ** | **December 31, 2008** | ** **  | **December 31, 2007** | ** ** |
|----------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| Canadian oil and gas property expenses | ** ** | **$**                           | **1,001.3** |                            | $          | 816.5 |   |
| Canadian development expenses          | ** ** | **360.7**                       |        | 326.1                           |       |
| Canadian exploration expenses          | ** ** | **41.5**                        |        | 52.5                            |       |
| Undepreciated capital costs            | ** ** | **414.5**                       |        | 460.2                           |       |
| Non-capital losses                     | ** ** | **86.9**                        |        | 13.8                            |       |
| SR&ED tax pools                    | ** ** | **0.3**                         |        | —                          |       |
| Provincial tax pools                   | ** ** | **155.9**                       |        | 161.1                           |       |
| Other                                  | ** ** | **7.0**                         |        | 10.3                            |       |
| Estimated tax basis                    | ** ** | **$**                           | **2,068.1** |                            | $          | 1,840.5 |   |

 

Nocurrent income taxes were paid or payable in both 2008 and 2007.

 

**16.****      ****EXCHANGEABLE SHARES**

 

TheTrust is authorized to issue an unlimited number of ARL Exchangeable Sharesthat can be converted (at the option of the holder) into trust units at any time.  The number of Trust units issuable uponconversion is based upon the exchange ratio in effect at the conversiondate.  The exchange ratio is calculatedmonthly based on the cash distribution paid divided by the ten day weightedaverage unit price preceding the record date and multiplied by the openingexchange ratio.  The exchangeable sharesare not eligible for distributions and, in the event that they are notconverted, any outstanding shares are redeemable by the Trust for Trust unitson August 28, 2012. The ARL Exchangeable Shares are publicly traded.

 
| **ARL Exchangeable Shares (thousands)** | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Balance, beginning of year                             | ** ** | **1,310**                       |       | 1,433                           |       |
| Exchanged for trust units (1)                          | ** ** | **(218**                        | **)**      | (123                            | )          |
| Balance, end of year                                   | ** ** | **1,092**                       |       | 1,310                           |       |
| Exchange ratio, end of year                            | ** ** | **2.51668**                     |       | 2.24976                         |       |
| Trust units issuable upon conversion, end  of year     | ** ** | **2,748**                       |       | 2,947                           |       |

 

----

(1)                     During 2008, 218,455 ARL exchangeable shareswere converted to trust units at an average exchange ratio of 2.36901, comparedto 123,263 exchangeable shares at an average exchange ratio of 2.12125 during2007.

 

24

----

 

The non-controlling interest on the ConsolidatedBalance Sheet consists of the fair value of the exchangeable shares uponissuance plus the accumulated earnings attributable to the non-controllinginterest.  The net income attributable tothe non-controlling interest on the Consolidated Statement of Income representsthe cumulative share of net income attributable to the non-controlling interestbased on the Trust units issuable for exchangeable shares in proportion tototal Trust units issued and issuable at each period end.

 

Following is a summary of the non-controllinginterest for 2008 and 2007:

 
| ** **                                                        | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Non-controlling interest, beginning of year                       | ** ** | **$**                       | **43.1**   |                        | $          | 40.0 |   |
| Reduction of book value for conversion to  trust units            | ** ** | **(7.6**                    | **)**      | (3.7                        | )          |
| Current year net income attributable to  non-controlling interest | ** ** | **6.9**                     |       | 6.8                         |       |
| Non-controlling interest, end of year                             | ** ** | **42.4**                    |       | 43.1                        |       |
| Accumulated earnings attributable to  non-controlling interest    | ** ** | **$**                       | **41.0**   |                        | $          | 34.1 |   |

 

**17.**** ****UNITHOLDERS’ CAPITAL**

 

The Trust is authorized to issue 650 million Trustunits of which 216.4 million units were issued and outstanding as at December 31,2008 (210.2 million as at December 31, 2007).

 

The Trust has in place a Distribution Reinvestmentand Optional Cash Payment Program (“DRIP”) in conjunction with the Trusts’transfer agent to provide the option for unitholders to reinvest cashdistributions into additional trust units issued from treasury at a five percent discount to the prevailing market price with no additional fees orcommissions.

**** ****

****The Trust is an open ended mutual fund under which unitholders have theright to request redemption directly from the Trust.  Trust unitstendered by holders are subject to redemption under certain terms andconditions including the determination of the redemption price at the lower ofthe closing market price on the date units are tendered or 90 per cent of theweighted average trading price for the 10 day trading period commencing on thetender date.  Cash payments for trust units tendered for redemption are********limitedto $100,000 per month with redemption requests in excess of this amounteligible to receive a note from ARC Resources Ltd. accruing interest at 4.5 percent and repayable within 20 years.****

** **
| ** **                                                 | ** ** | **December 31, 2008**                   | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **Number of  trust units  (thousands)** | ** ** | **$**                           | ** ** | **Number of  trust units  (thousands)** | ** ** | **$** | ** ** |
| Balance, beginning of year                                 | ** ** | **210,232**                                       | ** ** | **2,465.7**                     |       | 204,289 |   | 2,349.2 |   |
| Issued on conversion of ARL exchangeable  shares (Note 16) | ** ** | **517**                                           | ** ** | **7.6**                         |       | 261 |   | 3.7 |   |
| Issued on exercise of employee rights (Note  20)           | ** ** | **238**                                           | ** ** | **4.2**                         |       | 131 |   | 2.1 |   |
| Distribution reinvestment program                          | ** ** | **5,448**                                         | ** ** | **123.2**                       |       | 5,551 |   | 110.7 |   |
| Balance, end of year                                       | ** ** | **216,435**                                       | ** ** | **2,600.7**                     |       | 210,232 |   | 2,465.7 |   |

 

Net income per trust unit has been determined based on the following:

 
| ** **                                                     | ** ** | **December 31** | ** ** | **December 31** | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| ** **                                                     | ** ** | **(thousands)**      | ** ** | **(thousands)**      | ** ** |
| Weighted average trust units (1)                               | ** ** | **213,259**          |       | 207,287              |       |
| Trust units issuable on conversion of  exchangeable shares (2) | ** ** | **2,748**            |       | 2,947                |       |
| Dilutive impact of rights (3)                                  | ** ** | **50**               |       | 174                  |       |
| Diluted trust units and exchangeable shares                    | ** ** | **216,057**          |       | 210,408              |       |

 

----

(1)       Weighted average trust units excludes trustunits issuable for exchangeable shares.

(2)       Diluted trust units include trust unitsissuable for outstanding exchangeable shares at the year-end exchange ratio.

(3)       All outstanding rights were dilutive andtherefore have been included in the diluted unit calculation for both 2008 and2007.

 

25

----

 

Basic net income per unit has been calculatedbased on net income after non-controlling interest divided by weighted averagetrust units.  Diluted net income per unithas been calculated based on net income before non-controlling interest dividedby diluted trust units.

 

**18.**** ****DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME**

 
| ** **                                                 | ** ** | **December 31,  2008** | ** **  | **December 31,  2007** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| Accumulated earnings                                       | ** ** | **$**                       | **2,724.1** | ** **                  | $          | 2,191.1 |   |
| Accumulated distributions                                  | ** ** | **(3,227.0**                | **)**       | (2,657.0                    | )          |
| Deficit                                                    | ** ** | **$**                       | **(502.9**  | **)**                       | $          | (465.9 | ) |
| Accumulated other comprehensive income  (loss)             | ** ** | **1.9**                     | ** **  | (2.9                        | )          |
| Deficit and accumulated other comprehensive  income (loss) | ** ** | **$**                       | **(501.0**  | **)**                       | $          | (468.8 | ) |

 

The accumulated other comprehensive income (loss)balance is composed of the following items:

 
| ** **                                                                                 | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Unrealized gains and losses on financial  instruments designated as cash flow hedges       | ** ** | **$**                       | **2.0**    | ** **                  | $          | (2.8 | ) |
| Net unrealized gains and losses on  available-for-sale reclamation funds’ investments | ** ** | **(0.1**                    | **)**      | (0.1                        | )          |
| Accumulated other comprehensive income  (loss), end of year                                | ** ** | **$**                       | **1.9**    | ** **                  | $          | (2.9 | ) |

 

**19.**** ****RECONCILIATION OF CASH FLOW FROM OPERATING ACTIVITIES ANDDISTRIBUTIONS**

 

Distributions are calculated in accordance with theTrust Indenture. To arrive at distributions, cash flow from operatingactivities is reduced by reclamation fund contributions including interestearned on the funds, a portion of capital expenditures and, when applicable,debt repayments. The portion of cash flow from operating activities withheld tofund capital expenditures and to make debt repayments is at the discretion ofthe Board of Directors.

 
| ** **                                                 | ** ** | **December 31** | ** **  | **December 31** | ** ** |
|------------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| ** **                                                 | ** ** | **2008**             | ** **  | **2007**             | ** ** |
| Cash flow from operating activities                        | ** ** | **$**                | **944.4**   |                 | $          | 704.9 |   |
| Deduct:                                                    |       |                 |        |                 |       |
| Cash withheld to fund current period  capital expenditures | ** ** | **(372.2**           | **)**       | (211.6               | )          |
| Net reclamation fund (contributions) withdrawals           | ** ** | **(2.2**             | **)**       | 4.7                  |       |
| Distributions (1)                                          | ** ** | **570.0**            |        | 498.0                |       |
| Accumulated distributions, beginning of  year              | ** ** | **2,657.0**          |        | 2,159.0              |       |
| Accumulated distributions, end of year                     | ** ** | **$**                | **3,227.0** |                 | $          | 2,657.0 |   |
| Distributions per unit (2)                                 | ** ** | **$**                | **2.67**    |                 | $          | 2.40 |   |
| Accumulated distributions per unit,  beginning of year     | ** ** | **$**                | **21.03**   |                 | $          | 18.63 |   |
| Accumulated distributions per unit, end of  year (3)       | ** ** | **$**                | **23.70**   |                 | $          | 21.03 |   |

 

----

(1)       Distributions include accrued and non-cash amounts of $111.2 million forthe year ended December 31, 2008, ($110 million for the year ended December 31,2007).

(2)       Distributions per trust unit reflect the sum of the per trust unitamounts declared monthly to unitholders.

(3)       Accumulated distributions per unit reflect the sum of the per trust unitamounts declared monthly to unitholders since the inception of the Trust in July 1996.

 

**20.**** ****TRUST UNIT INCENTIVE RIGHTS PLAN**

 

The Trust Unit Incentive Rights Plan (the “RightsPlan”) was established in 1999 and authorized the Trust to grant up to8,000,000 rights to its employees, independent directors and long-termconsultants to purchase Trust units, of which 7,866,088 were granted before theplan was discontinued in 2004 and replaced with a Whole Unit Plan (See Note21).   During 2008 the remaining 238thousand rights were exercised, at a weighted average exercise price of$10.40.  As of December 31, 2008 allrights issued under the Rights Plan have been exercised or cancelled.

 

26

----

 

The Trust did not record any compensationexpense for 2008 (a nominal amount in 2007) for the cost associated with therights.

 

Upon exercise of the rights,the remaining $1.7 million balance in contributed surplus was reduced to $niland a corresponding increase was booked to unitholders’ capital.

** **

**21.  WHOLE TRUST UNITINCENTIVE PLAN**

 

In March 2004, theBoard of Directors, upon recommendation of the Compensation Committee, approveda new Whole Trust Unit Incentive Plan (the “Whole Unit Plan”) to replace theexisting Trust Unit Incentive Rights Plan for new awards granted subsequent to March 31,2004. The new Whole Unit Plan results in employees, officers and directors (the“plan participants”) receiving cash compensation in relation to the value of aspecified number of underlying notional trust units.  The Whole Unit Plan consists of RestrictedTrust Units (“RTUs”) for which the number of trust units is fixed and will vestevenly over a period of three years and Performance Trust Units (“PTUs”) forwhich the number of trust units is variable and will vest at the end of threeyears.

 

Upon vesting, the planparticipant receives a cash payment based on the fair value of the underlyingtrust units plus accrued distributions. The cash compensation issued upon vesting of the PTUs is dependent uponthe future performance of the Trust compared to its peers based on aperformance multiplier.  The performancemultiplier is based on the percentile rank of the Trust’s Total UnitholderReturn. The cash compensation issued upon vesting of the PTUs may range fromzero to two times the value of the PTUs originally granted.

 

The fair valueassociated with the RTUs and PTUs is expensed in the statement of income overthe vesting period. As the value of the RTUs and PTUs is dependent upon thetrust unit price, the expense recorded in the statement of income may fluctuateover time.

 

The Trust recorded non-cash compensation expense of $1.1 million and$(0.1) million to general and administrative and operating expenses,respectively, and capitalized $0.6 million to property, plant and equipment inthe twelve months ended December 31, 2008 for the estimated cost of theplan ($3.2 million, $0.3 million, and $0.7 million for the twelve months ended December 31,2007). The non-cash compensation expense was based on the December 31, 2008unit price of $20.10 ($20.40 in 2007), accrued distributions, an averageperformance multiplier of 1.6 (1.7 in 2007), and the estimated number of unitsto be issued on maturity.

 

The following table summarizes the RTU and PTU movement for the yearended December 31, 2008:

 
| ** **                 | ** ** | **Number of RTUs  (thousands)** | ** ** | **Number of PTUs  (thousands)** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Balance, beginning of year |       | 746                                       |       | 903                                       |       |
| Vested                     |       | (347                                      | )          | (252                                      | )          |
| Granted                    |       | 403                                       |       | 352                                       |       |
| Forfeited                  |       | (46                                       | )          | (44                                       | )          |
| Balance, end of year       |       | 756                                       |       | 959                                       |       |

 

The change in the net accrued long-term incentivecompensation liability relating to the Whole Trust Unit Incentive Plan can bereconciled as follows:

 
| ** **                               | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Balance, beginning of year               | ** ** | **$**                           | **30.3**   | ** **                      | $          | 26.1 |   |
| Change in net liabilities in the year    |       |                            | ** ** |                            |       |
| General and administrative expense       | ** ** | **1.1**                         | ** ** | 3.2                             |       |
| Operating expense                        | ** ** | **(0.1**                        | **)**      | 0.3                             |       |
| Property, plant and equipment            | ** ** | **0.6**                         | ** ** | 0.7                             |       |
| Balance, end of year (1)                 | ** ** | **$**                           | **31.9**   | ** **                      | $          | 30.3 |   |
| Current portion of liability             | ** ** | **18.8**                        | ** ** | 18.2                            |       |
| Accrued long-term incentive compensation | ** ** | **$**                           | **14.2**   | ** **                      | $          | 12.1 |   |

 

----

(1)       Includes $1.1 million of recoverable amountsrecorded in accounts receivable as at December 31, 2008 (nil for 2007).

 

27

----

 

During the year cash payments of $28.2 million weremade to employees relating to the Whole Unit Plan ($12.7 million in 2007).

 

**22.**** ****COMMITMENTS AND CONTINGENCIES**

 

Following is a summary of theTrust’s contractual obligations and commitments as at December 31, 2008:

 
| ** **                            | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| **($ millions)**                 | ** ** | **2009**                                  | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Debt repayments (1)                   |       | 22.2                                      |       | 696.0 |   | 79.1 |   | 104.5 |   | 901.8 |   |
| Interest payments (2)                 |       | 12.8                                      |       | 22.2 |   | 15.4 |   | 10.0 |   | 60.4 |   |
| Reclamation fund contributions (3)    |       | 5.2                                       |       | 9.5 |   | 8.3 |   | 67.9 |   | 90.9 |   |
| Purchase commitments                  |       | 13.0                                      |       | 15.4 |   | 5.0 |   | 4.9 |   | 38.3 |   |
| Transportation commitments (4)        |       | —                                    |       | 14.9 |   | 21.9 |   | 21.0 |   | 57.8 |   |
| Operating leases                      |       | 7.0                                       |       | 9.8 |   | 14.3 |   | 81.8 |   | 112.9 |   |
| Risk management contract premiums (5) |       | 19.3                                      |       | — |   | — |   | — |   | 19.3 |   |
| Total contractual obligations         |       | 79.5                                      |       | 767.8 |   | 144.0 |   | 290.1 |   | 1,281.4 |   |

 

----

(1)       Long-term and short-term debt, excludinginterest.

(2)       Fixed interest payments on senior securednotes.

(3)       Contribution commitments to a restrictedreclamation fund associated with the Redwater property.

(4)       Fixed payments for transporting productionfrom the Dawson gas plant, expected to be operational in early 2010.

(5)       Fixed premiums to be paid in future periods oncertain commodity risk management contracts.

 

Inaddition to the above Risk management contract premiums, the Trust hascommitments related to its risk management program (see Note 13).  As the premiums are part of the underlyingrisk management contract, they have been recorded at fair market value at December 31,2008 on the balance sheet as part of risk management contracts.

 

The Trust enters into commitments for capital expenditures in advanceof the expenditures being made.  At agiven point in time, it is estimated that the Trust has committed to capitalexpenditures equal to approximately one quarter of its capital budget by meansof giving the necessary authorizations to incur the expenditures in a futureperiod.  The Trust’s 2009 capital budgethas been approved by the Board at $450 million. This commitment has not been disclosed in the commitment table as it isof a routine nature and is part of normal course of operations for active oiland gas companies and trusts.

 

The2009 capital budget of $450 million includes approximately $11 million forleasehold development costs related to the Trust’s new office space in downtownCalgary.  These costs will be incurred throughout 2009 with additionalamounts to be incurred in 2010.  The operating lease commitments for thenew space are included in the table above.

 

The Trust is involved inlitigation and claims arising in the normal course of operations.  Management is of the opinion that pendinglitigation will not have a material adverse impact on the Trust’s financialposition or results of operations and therefore the above table does notinclude any commitments for outstanding litigation and claims.

 

**23.**** ****SUBSEQUENT EVENTS**

 

On January 21, 2009 the Trust announcedthat it had entered into an agreement, on a bought deal basis, with a syndicateof underwriters for an offering of 13,456,000 trust units at $16.35 per trustunit, for gross proceeds of $220 million as well as an over-allotment option topurchase, on the same terms and conditions, up to an additional 2,018,400 trustunits. This option was exercised in whole prior to closing of the offering on February 6,2009. The gross proceeds raised under this offering were $253 million andproceeds net of underwriter and transaction fees were approximately $240million.  The proceeds were used to repaydebt, thereby freeing up borrowing capacity to fund a portion of the Trust’s2009 capital program.

 

28

----

 

**24.**** ****DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES**

 

The consolidated financial statements have beenprepared in accordance with Canadian GAAP, which differs in some respects fromUS GAAP.  Any differences in accountingprinciples as they pertain to the accompanying consolidated financialstatements are immaterial except as described below:

 

The application of US GAAP would have the followingeffect on net income as reported for years ended December 31, 2008 and2007.

** **
| ** **                                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| Net income as reported for Canadian GAAP                                        | ** ** | **$**                 | **533.0**  | ** **            | $          | 495.3 |   |
| Adjustments:                                                                    |       |                  | ** ** |                  |       |
| Depletion and depreciation (a)                                                  | ** ** | **8.1**               | ** ** | 13.7                  |       |
| Ceiling test write-down (a)                                                     | ** ** | **(1,150.4**          | **)**      | —                |       |
| Unit based compensation (b)                                                     | ** ** | **(0.9**              | **)**      | (0.4                  | )          |
| Non-controlling interest (c)                                                    | ** ** | **6.9**               | ** ** | 6.8                   |       |
| Effect of applicable income taxes on the  above adjustments and rate change (f) | ** ** | **292.9**             | ** ** | 11.7                  |       |
| Deferred income tax expense (g)                                                 | ** ** | **(15.6**             | **)**      | (0.1                  | )          |
| Net (loss) income under US GAAP                                                 | ** ** | **$**                 | **(326.0** | **)**                 | $          | 527.0 |   |
|                                                                            | ** ** | ** **            | ** ** |                  |       |
| Net income per Trust unit (Note 17)                                             | ** ** | ** **            | ** ** |                  |       |
| Basic (d)                                                                       | ** ** | **$**                 | **(1.51**  | **)**                 | $          | 2.51 |   |
| Diluted (d)                                                                     | ** ** | **$**                 | **(1.51**  | **)**                 | $          | 2.50 |   |
| ** **                                                                      |       |                  |       |                  |       |
| **Comprehensive Income:**                                                       |       |                  |       |                  |       |
| Net (loss) income under US GAAP                                                 | ** ** | **$**                 | **(326.0** | **)**                 | $          | 527.0 |   |
| Other Comprehensive Income (loss)                                               | ** ** | **4.8**               | ** ** | (6.6                  | )          |
| Comprehensive (loss) income                                                     | ** ** | **$**                 | **(321.2** | **)**                 | $          | 520.4 |   |

 

The application of US GAAP wouldhave the following effect on the consolidated balance sheets as reported:

 
| ** **                                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| ** **                                     | ** ** | **Canadian  GAAP**    | ** ** | **US  GAAP**          | ** ** | **Canadian  GAAP** | ** ** | **US  GAAP** | ** ** |
| Property, plant and equipment (a)              |       | $                     | 3,376.6    |                  | $          | 2,131.2 |   | $ | 3,143.0 |   | $ | 3,039.9 |   |
| Accounts payable and accrued liabilities  (g)  |       | (194.4                | )          | (210.4                | )          | (180.6 | ) | (181.0 | ) |
| Trust unit rights liability (b)                |       | —                |       | —                |       | — |   | (2.5 | ) |
| Future income taxes/Deferred income taxes  (f) |       | (309.4                | )          | 18.5                  |       | (312.2 | ) | (277.2 | ) |
| Non-controlling interest (c)                   |       | (42.4                 | )          | —                |       | (43.1 | ) | — |   |
| Temporary equity (b), (c), (e)                 |       | —                |       | (3,796.3              | )          | — |   | (3,973.7 | ) |
| Unitholders’ capital (e)                  |       | (2,600.7              | )          | —                |       | (2,465.7 | ) | — |   |
| Contributed surplus (b)                        |       | —                |       | —                |       | (1.7 | ) | — |   |
| Deficit (e)                                    |       | 502.9                 |       | 2,589.6               |       | 465.9 |   | 2,000.1 |   |
|                                                |            |                       |            |                       |            |  |  |  |  |  |  |  |  |

 

----

Theabove noted differences between Canadian GAAP and US GAAP are the result of thefollowing:

 

(a)       Under Canadian GAAP, impairment is recognized if the carrying amount ofthe PP&E exceeds the sum of the undiscounted cash flows expected to resultfrom the Trust’s proved reserves.  Cashflows are calculated based on third party quoted forward prices, adjusted forthe Trust’s contract prices and quality differentials.  Upon recognition of impairment, the Trustwould then measure the amount of impairment by comparing the carrying amountsof the PP&E to an amount equal to the estimated net present value of 

 

29

----

 

future cash flows from proved plus risked probablereserves plus the cost of unproved properties less impairment.  The Trust’s risk-free interest rate is usedto arrive at the net present value of the future cash flows.  Any excess carrying value above the netpresent value of the Trust’s estimated future cash flows would be recorded as apermanent impairment and charged against earnings.

 

Under US GAAP, companies using the full cost methodof accounting for oil and gas producing activities perform a ceiling test oneach cost centre using discounted estimated future net revenue from proved oiland gas reserves using a discount rate of 10 per cent. Prices used in the USGAAP ceiling tests are those in effect at year-end. For the year ended 2008, aceiling test write-down of $1.15 billion was recorded for US GAAP purposes($nil in 2007). The amounts recorded for depletion and depreciation have beenadjusted in the periods following similar additional write-downs taken under USGAAP in prior years to reflect the impact of the reduction of depletable costs.

 

AUS GAAP difference also exists relating to the basis of measurement of provedreserves that is utilized in the depletion calculation.  Under US GAAP, depletion charges arecalculated by reference to proved reserves estimated using constantprices.  Under Canadian GAAP, depletioncharges are calculated by reference to proved reserves estimated using futureprices.

 

(b)       Under US GAAP, rights granted under therights plan are considered liability awards and must be fair valued at eachreporting date in accordance with SFAS 123R. Changes in fair values between periods are charged or credited toearnings with a corresponding change in the trust unit rights liability.  Once the rights are exercised this amount isclassified to temporary equity.

 

UnderCanadian GAAP, the rights plan is treated as an equity award with the initialfair value calculated upon grant date. The fair value is then recorded tocompensation expense and credited to contributed surplus over the vestingperiod of the rights. Upon any rights exercises, the fair value recorded incontributed surplus is reclassified to unitholders’ capital.

 

TheTrust’s Whole Unit Plan is also accounted for in accordance with SFAS 123R.Under Canadian GAAP the plan is intrinsically valued. There is, however, nomaterial US GAAP difference as terms of the plan result in the fair value ofthe plan approximating the intrinsic value.

 

(c)       Under Canadian GAAP, ARL Exchangeable Shares are classified asnon-controlling interest to reflect a minority ownership in one of the Trust’ssubsidiaries. As these exchangeable shares must ultimately be converted intoTrust Units, the exchangeable shares are classified as temporary equity alongwith the Trust Units for US GAAP purposes using the exchange ratio.

 

(d)       Under Canadian GAAP, basic net income per unit is calculated based onnet income after non-controlling interest divided by weighted average trustunits and diluted net income per unit is calculated based on net income beforenon-controlling interest divided by diluted trust units. Under US GAAP, as theexchangeable shares are classified in the same manner as the trust units withno non-controlling interest treatment, basic net income per unit is calculatedbased on net income divided by weighted average trust units and the trust unitequivalent of the outstanding exchangeable shares. Diluted net income per unitis calculated based on net income divided by a sum of the weighted averagetrust units, the trust unit equivalent of the outstanding exchangeable shares,and the dilutive impact of rights.

 

(e)       Under US GAAP, as the Trust Units are redeemable at the option of theunitholder, the Trust Units must be recorded at their redemption amount andpresented as temporary equity in the consolidated balance sheet. The redemptionamount is determined based on the lower of the closing market price on thebalance sheet date or 90 percent of the weighted average trading price for the10 day trading period commencing on the balance sheet date of the Trust Unitsand the Trust Unit equivalent of the exchangeable shares outstanding. UnderCanadian GAAP, all Trust Units are classified as permanent equity. As at December 31,2008 and December 31, 2007, the Trust has classified $3.8 billion and $4.0billion, respectively, as temporary equity in accordance with US GAAP. Changesin redemption value between periods are charged or credited to deficit. For theyear ended December 31, 2008, $306.5 million was credited to deficit ($38million charged to deficit for the year ending December 31, 2007).

 

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(f)        During 2007, legislation was passed whereby distributions paid by theTrust will be subject to tax beginning in 2011. As a result, the deferred taxposition of the Trust, the parent entity, is now required to be reflected inthe consolidated deferred income tax calculation for US and Canadian GAAPpurposes. A one time recovery of $21.9 million was booked for US GAAP purposesin 2007 relating to ceiling test write-downs made in prior periods which werenot previously income tax affected at the Trust level. An additional deferredincome tax expense of $6.5 million was also recorded in 2007 due to the decreasein the deferred income tax rate in a taxable entity.

 

For the year ended December 31,2008, $292.9 million relating to deferred income tax recovery on DD&Aadjustments and ceiling test write-downs taken under US GAAP was recorded ($3.7million deferred income tax expense for the year ended December 31, 2007).

 

(g)       Effective January 1, 2007, the Trust adopted the FinancialAccounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accountingfor Uncertainty in Income Taxes”.  FIN 48is an interpretation of FASB Statement No. 109, “Accounting for IncomeTaxes” and prescribes a comprehensive model for recognizing, measuring,presenting and disclosing in the financial statements uncertain tax positionsthat the Trust has taken or expects to take in its income tax returns.

 

The Trust recorded anadditional charge to deferred income tax expense of $15.6 million for uncertaintax positions including accrued interest and penalties of $3.6 million.  As at December 31, 2008, the totalamount included in accounts payable and accrued liabilities in relation touncertain tax positions in the US GAAP Consolidated Balance Sheet was $16.0million including accrued interest and penalties of $3.7 million.

 

(h)       In 2008 and 2007, the FASB and SEC issued new and revised standards, allof which were assessed by Management to be not applicable to the Trust with theexception of the following:

 

·          On December 31, 2008, the SEC published final rules andinterpretations updating its oil and gas reporting requirements.  Key revisionsinclude changes to the pricing used to estimate reserves to utilize a twelvemonth average price, the ability to include nontraditional resources inreserves, the use of new technology for determining reserves, and permittingdisclosure of probable and possible reserves.  The SEC will requirecompanies to comply with the amended disclosure requirements for registrationstatements filed after January 1, 2010, and for annual reports for fiscalyears ending on or after December 15, 2009.  Early adoption is notpermitted.  The Trust is currently assessing the impact of adoption in2009, however it is anticipated that the new requirements will result inchanges to the Trust’s method of calculating DD&A and the impairment testunder US GAAP.

 

·          In February 2008, the FASB issued FSP FAS 157-2 to defer Statement157’s effective date for all nonfinancial assets and liabilities, except thoseitems recognized or disclosed at fair value on an annual or more frequentlyrecurring basis, until years beginning after November 15, 2008. We do notexpect the adoption of FAS 157-2 to have a material impact on the Trust’sresults of operations or financial position. The Trust adopted FAS 157 for all financial assets during 2008,resulting in no differences from Canadian GAAP.

 

·          In December 2007, FASB issued Statement No. 141(R), BusinessCombinations and Statement No. 160, Non-controlling Interests inConsolidated Financial Statements. These statements require: more assets andliabilities assumed to be measured at fair values as of the acquisition date;liabilities related to contingent consideration to be re-measured at fair valuein each subsequent reporting period; all acquisition-related costs to beexpensed; and non-controlling interests in subsidiaries initially to bemeasured at fair value and classified as a separate component of equity. SFAS141(R) and 160 are effective for fiscal years beginning on or after December 15,2008. The standard should be applied prospectively, with the exception ofcertain adjustments for income taxes. Statement 160 requires the entity toapply the presentation and disclosure requirements retroactively to comparativefinancial statements. We do not expect the adoption of this statement to have amaterial impact on the results of operations or financial position as thestandard applies to future acquisitions.

 

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